-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Mmbh5he57CXnLbLd4V0T/zZcSMJO/UdwOT6P7WSxpjuzm8gJ7eMWeqxhIt7eVwD3 nc/TjHuZa0n0NFEYaHBHMA== 0000950144-98-003223.txt : 19980326 0000950144-98-003223.hdr.sgml : 19980326 ACCESSION NUMBER: 0000950144-98-003223 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980325 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: POPULAR INC CENTRAL INDEX KEY: 0000763901 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 660416582 STATE OF INCORPORATION: PR FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-13818 FILM NUMBER: 98572831 BUSINESS ADDRESS: STREET 1: 209 MUNOZ RIVERA AVE STREET 2: POPULAR CENTER BUILDING CITY: HATO REY STATE: PR ZIP: 00918 BUSINESS PHONE: 8097659800 MAIL ADDRESS: STREET 1: P.O. BOX 362708 CITY: SAN JUAN STATE: PR ZIP: 00936-2708 FORMER COMPANY: FORMER CONFORMED NAME: BANPONCE CORP DATE OF NAME CHANGE: 19920703 10-K 1 POPULAR, INC. 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF - --- THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the Fiscal Year Ended December 31, 1997 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF - --- THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) Commission File No. 0-13818 POPULAR, INC. Incorporated in the Commonwealth of Puerto Rico IRS Employer Identification No. 66-0416582 Principal Executive Offices: 209 Munoz Rivera Avenue Hato Rey, Puerto Rico 00918 Telephone Number: (809) 765-9800 - -------------------------------------------------------------------------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock ($6.00 par value) 8.35% Non-Cumulative Monthly Income Preferred Stock, 1994 Series A (Liquidation Preference $25.00 Per Share) Series A Participating Cumulative Preferred Stock Purchase Rights Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] --------------------------------------------- As of February 27, 1998 the Corporation had 67,717,548 shares of common stock outstanding. The aggregate market value of the common stock held by non-affiliates of the Corporation was $3,540,273,000 based upon the reported closing price of $52.28 on the NASDAQ National Market System on that date. DOCUMENTS INCORPORATED BY REFERENCE (1) Portions of the Corporation's Annual Report to Shareholders for the fiscal year ended December 31, 1997 are incorporated herein by reference in response to Item 1 of Part I. (2) Portions of the Corporation's Proxy Statement relating to the 1998 Annual Meeting of Stockholders of the Corporation are incorporated herein by reference to Items 10 through 13 of Part III. 2 TABLE OF CONTENTS
Page ---- PART I Item 1 Business.................................................... 3 Item 2 Properties.................................................. 11 Item 3 Legal Proceedings........................................... 11 Item 4 Submission of Matters to a Vote of Security Holders......... 12 PART II Item 5 Market for Registrant's Common Stock and Related Stockholder Matters...................................... 12 Item 6 Selected Financial Data .................................... 13 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 13 Item 7A Quantitative and Qualitative Disclosures About Market Risk.. 14 Item 8 Financial Statements and Supplementary Data ............... 14 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ..................... 14 PART III Item 10 Directors and Executive Officers of the Registrant ......... 14 Item 11 Executive Compensation ..................................... 14 Item 12 Security Ownership of Certain Beneficial Owners and Management .......................................... 14 Item 13 Certain Relationships and Related Transactions ............. 14 PART IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K .................................... 15
2 3 PART I POPULAR, INC. ITEM 1 BUSINESS Popular, Inc. (formerly BanPonce Corporation) (the "Corporation") is a diversified, publicly owned bank holding company, registered under the Bank Holding Company Act of 1956, as amended (the "BHC Act") and, accordingly, subject to the supervision and regulation of the Board of Governors of the Federal Reserve System ("the Federal Reserve Board"). The Corporation was incorporated in 1984 under the laws of the Commonwealth of Puerto Rico and is the largest financial institution in Puerto Rico, with consolidated assets of $19.3 billion, total deposits of $11.7 billion and stockholders' equity of $1.5 billion at December 31, 1997. Based on total assets at June 30, 1997, the Corporation was the 44th largest bank holding company in the United States. At the Corporation's annual meeting of shareholders held on April 25, 1997, the Corporation's shareholders approved a proposal made by the Board of Directors to change the name of BanPonce Corporation to Popular, Inc. The Corporation's principal subsidiary, Banco Popular de Puerto Rico ("Banco Popular" or the "Bank"), was incorporated over 100 years ago in 1893 and is Puerto Rico's largest bank with total assets of $16.0 billion, deposits of $10.6 billion and stockholders' equity of $1.3 billion at December 31, 1997. The Bank, on a consolidated basis, accounted for 83% of the total consolidated assets of the Corporation at December 31, 1997. A consumer-oriented bank, Banco Popular has the largest retail franchise in Puerto Rico, operating 201 branches and 391 automated teller machines. The Bank also has the largest trust operation in Puerto Rico and is the largest servicer of mortgage loans for investors. In addition, it operates the largest Hispanic bank branch network in the mainland United States with 29 branches in New York and an agency in Chicago. As of December 31, 1997, these branches had a total of approximately $1.5 billion in deposits. The Bank also operates seven branches in the U.S. Virgin Islands and one branch in the British Virgin Islands. Banco Popular's deposits are insured by the Federal Deposit Insurance Corporation (the "FDIC"). On June 30, 1997, the Corporation completed the acquisition and merger of Roig Commercial Bank ("RCB") with and into Banco Popular. RCB operated 25 branches, mainly located in the eastern part of Puerto Rico, with assets of $791 million and deposits of $584 million as of June 30, 1997. Banco Popular has three subsidiaries, Popular Leasing & Rental, Inc., Puerto Rico's largest vehicle leasing and daily rental company, Popular Finance, Inc., (formerly Popular Consumer Services, Inc.), a small-loan and second mortgage company with 39 offices in Puerto Rico operating under the name of Popular Finance, and Popular Mortgage, Inc., a mortgage loan company with four offices in Puerto Rico operating under the name of Popular Home Mortgage (formerly Puerto Rico Home Mortgage). The Corporation has two other principal subsidiaries; Popular Securities Incorporated (formerly BP Capital Markets, Inc.), which engages in the business of securities broker-dealer in Puerto Rico, with brokerage, financial advisory, investment and security brokerage operations for institutional and retail customers and Popular International Bank, Inc. ("PIB"), which in turn owns all of the outstanding stock of Popular North America, Inc. (formerly BanPonce Financial Corp) ("PNA"); and ATH Costa Rica, which provides ATM switching and driving services in San Jose, Costa Rica. PIB is a wholly-owned subsidiary of the Corporation organized in 1992 under the laws of the Commonwealth of Puerto Rico and operating as an "international banking entity" under the International Banking Center Regulatory Act of Puerto Rico (the "IBC Act"). PIB is principally engaged in providing managerial services to its subsidiaries. PNA, a wholly-owned subsidiary of PIB and an indirect wholly-owned subsidiary of the Corporation, was organized in 1991 under the laws of the State of Delaware. PNA has five subsidiaries, all of which are wholly-owned: Banco Popular North America (formerly National Bancorp, Inc.), (BPNA), which is the holding company of Banco Popular, Illinois; Banco Popular, N.A. Florida ("Banco Popular (Florida)"), Banco Popular, N.A. (Texas) ("Banco Popular (Texas)"), Banco Popular, N.A. (California) ("Banco Popular (California)") and Banco Popular, FSB. As a result of the ownership of Banco Popular, Illinois, Banco Popular (California), Banco Popular (Florida) and Banco Popular (Texas), PIB, PNA and BPNA are registered bank holding companies under the BHC Act. On May 31, 1997, PNA acquired CBC Bancorp, Ltd. ("CBC") and National Bancorp, Inc. ("NBI"). CBC, an Illinois corporation, was the parent company of Capitol Bank and Trust and Capitol Bank of Westmont, with assets of $325.1 million and deposits of $266.2 million at May 31, 1997, operating three branches in Chicago and Westmont, Illinois through its banking subsidiaries. NBI, a Delaware corporation, was the parent company of AmericanMidwest Bank and Trust with assets of $188.8 million and deposits of $141.4 million at May 31, 1997, operating two branches in Chicago. 3 4 On October 31, 1997, PNA reorganized the structure of its banking operation in the State of Illinois by merging Capitol Bank and Trust, Capitol Bank of Westmont and Banco Popular, Illinois (formerly Pioneer Bank and Trust Company) with and into AmericanMidwest Bank and Trust, whose legal name was changed to Banco Popular, Illinois. Furthermore, the Corporation merged the holding companies of those banks into NBI, whose legal name was changed to BPNA, resulting in a simplified corporate structure where PNA, through its wholly-owned subsidiary of BPNA, holds all the outstanding common stock of Banco Popular, Illinois. The deposits of Banco Popular, Illinois are insured by the Federal Deposit Insurance Corporation ("FDIC"). As of December 31, 1997, the assets of Banco Popular, Illinois were $965.1 million, its deposits were $779.6 million, and its branch network consisted of 13 branches. In addition, Banco Popular, Illinois owns all of the outstanding stock of Popular Leasing, USA, a non-banking subsidiary that offers small ticket equipment leasing in seven states, with total assets of $14 million as of December 31, 1997. On April 30, 1997, PNA acquired Seminole National Bank, a bank organized under the laws of the State of Florida with three branches in that State. In May 1997, Seminole National Bank changed its legal name to Banco Popular, N.A. Florida. As of December 31, 1997, the assets of Banco Popular (Florida) were $67.7 million and its deposits were $55.8 million operating six branches in Florida. The deposits of Banco Popular (Florida) are insured by the FDIC. Also, on December 1, 1997, PNA acquired all of the common stock of Houston BanCorporation, Inc., a corporation organized under the laws of the State of Texas. Houston BanCorporation, Inc. was the bank holding company of Citizens National Bank, which operated one location in Houston, Texas. In December 1997, Houston BanCorporation, Inc. was merged with and into PNA, and the legal name of Citizens National Bank was changed to Banco Popular, N.A. (Texas). As of December 31, 1997, the assets of Banco Popular (Texas) were $66.5 million and its deposits were $44.8 million with one branch operating in Houston, Texas. The deposits of Banco Popular (Texas) are also insured by the FDIC. Banco Popular (California), is a national bank operating six branches in California with total assets of $141.7 million and deposits of $104.6 million as of December 31, 1997. In December 1997, CombanCorp, the holding company of Banco Popular (California), was merged with and into PNA. The deposits of Banco Popular (California) are also insured by the FDIC. Banco Popular, FSB, is a federal savings bank which acquired from the Resolution Trust Corporation certain assets and all of the deposits of four New Jersey branches of the former Carteret Federal Savings Bank, a federal savings bank under Resolution Trust Corporation ("RTC") conservatorship. The deposits of Banco Popular, FSB are insured by the FDIC and it is subject to the supervision of the Office of Thrift Supervision. See "Certain Regulatory Matters". Banco Popular, FSB owns Equity One, Inc., a Delaware corporation ("Equity One"). Equity One is a diversified consumer finance company engaged in the business of making personal and mortgage loans and providing dealer financing through 117 offices in 30 states with total assets of $1.2 billion as of December 31, 1997. Equity One had initially been acquired by PNA on September 30, 1991, prior to which time PNA had no significant business operations. The Corporation's business is described on pages 1 through 26 of the Business Review Section of the Annual Report to Shareholders for the year ended December 31, 1997, which is incorporated herein by reference. REGULATION AND SUPERVISION GENERAL Each of the Corporation, PIB, PNA and BPNA are bank holding companies subject to the supervision and regulation by the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") under the BHC Act. As a bank holding company, the Corporation's, PIB's, PNA's and BPNA's activities and those of their banking and non-banking subsidiaries are limited to the business of banking and activities closely related or incidental to banking, and none of the Corporation, PIB, PNA or BPNA may directly or indirectly acquire the ownership or control of more than 5% of any class of voting shares or substantially all of the assets of any company, in the United States including a bank, without the prior approval of the Federal Reserve Board. In addition, bank holding companies are generally prohibited under the BHC Act from engaging in non-banking activities, subject to certain exceptions. Banco Popular is considered a foreign bank for purposes of the International Banking Act of 1978 (the "IBA"). Under the IBA Banco Popular is not permitted to operate a branch or agency, that is located outside of its "home state", except to the extent that a national bank with the same home state is permitted to do so as described under "Interstate Banking and Legislation" below. Puerto 4 5 Rico is not considered a state for purposes of these geographic limitations. Banco Popular has designated the state of New York as its home state. In addition, some states have laws prohibiting or restricting foreign banks from acquiring banks located in such states and treat Puerto Rico's banks and bank holding companies as foreign banks for such purposes. Banco Popular, Banco Popular, Illinois, Banco Popular (California), Banco Popular (Florida), Banco Popular (Texas) and Banco Popular, FSB are subject to supervision and examination by applicable federal and state banking agencies including, in the case of Banco Popular, the Federal Reserve Board and the Office of the Commissioner of Financial Institutions of Puerto Rico, in the case of Banco Popular, Illinois, the FDIC and the Illinois Commissioner of Banks and Trust Companies, in the case of Banco Popular (California), Banco Popular (Florida) and Banco Popular (Texas) the Office of the Comptroller of the Currency (the "OCC") and in the case of Banco Popular, FSB, the Office of Thrift Supervision (the "OTS") and the FDIC. Banco Popular, Banco Popular, Illinois, Banco Popular (California), Banco Popular (Florida), Banco Popular (Texas) and Banco Popular, FSB are subject to requirements and restrictions under federal and state law, including requirements to maintain reserves against deposits, restrictions on the types and amounts of loans that may be granted and the interest that may be charged thereon, and limitations on the types of other investments that may be made and the types of services that may be offered. Various consumer laws and regulations also affect the operations of Banco Popular, Banco Popular, Illinois, Banco Popular (California), Banco Popular (Florida), Banco Popular (Texas) and Banco Popular, FSB. In addition to the impact of regulations, commercial banks are affected significantly by the actions of the Federal Reserve Board as it attempts to control the money supply and credit availability in order to influence the economy. FDICIA Under the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") the federal banking regulators must take prompt corrective action in respect of depository institutions that do not meet minimum capital requirements. FDICIA and regulations thereunder established five capital tiers: "well capitalized", "adequately capitalized," "undercapitalized", "significantly undercapitalized", and "critically undercapitalized". A depository institution is deemed well capitalized if it maintains a leverage ratio of at least 5%, a risk-based Tier 1 capital ratio of at least 6% and a risk-based total capital ratio of at least 10% and is not subject to any written agreement or directive to meet a specific capital level. A depository institution is deemed adequately capitalized if it is not well capitalized but maintains a leverage ratio of at least 4% (or at least 3% if given the highest regulatory rating and not experiencing or anticipating significant growth), a risk-based Tier 1 capital ratio of at least 4% and a risk-based total capital ratio of at least 8%. A depository institution is deemed undercapitalized if it fails to meet the standards for adequately capitalized institutions (unless it is deemed significantly or critically undercapitalized). An institution is deemed significantly undercapitalized if it has a leverage ratio of less than 3%, a risk-based Tier 1 capital ratio of less than 3% or a risk-based total capital ratio of less than 6%. An institution is deemed critically undercapitalized if it has tangible equity equal to 2% or less of total assets. A depository institution may be deemed to be in a capitalization category that is lower than is indicated by its actual capital position if it receives a less than satisfactory examination rating in any one of four categories. At December 31, 1997, Banco Popular, Banco Popular, Illinois, Banco Popular (California), Banco Popular (Florida), Banco Popular (Texas) and Banco Popular, FSB were each well capitalized. An institution's capital category, as determined by applying the prompt corrective action provisions of law, may not constitute an accurate representation of the overall financial condition or prospects of the Corporation or its banking subsidiaries, and should be considered in conjunction with other available information regarding the Corporation's financial condition and results of operations. FDICIA generally prohibits a depository institution from making any capital distribution (including payment of a dividend) or paying any management fee to its holding company if the depository institution would thereafter be undercapitalized. Undercapitalized depository institutions are subject to restrictions on borrowing from the Federal Reserve System. In addition, undercapitalized depository institutions are subject to growth limitations and are required to submit capital restoration plans. A depository institution's holding company must guarantee the capital plan, up to an amount equal to the lesser of 5% of the depository institution's assets at the time it becomes undercapitalized or the amount of the capital deficiency when the institution fails to comply with the plan. The federal banking agencies may not accept a capital plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution's capital. If a depository institution fails to submit an acceptable plan, it is treated as if it is significantly undercapitalized. Significantly undercapitalized depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets and cessation of receipt of deposits from correspondent banks. Critically undercapitalized depository institutions are subject to appointment of a receiver or conservator. 5 6 The capital-based prompt corrective action provisions of FDICIA and their implementing regulations apply to FDIC-insured depository institutions such as the banking and savings association subsidiaries of the Corporation, PIB, PNA and BPNA, but they are not directly applicable to holding companies, such as the Corporation, PIB, PNA and BPNA which control such institutions. However, federal banking agencies have indicated that, in regulating holding companies, they may take appropriate action at the holding company level based on their assessment of the effectiveness of supervisory actions imposed upon subsidiary insured depository institutions pursuant to such provisions and regulations. HOLDING COMPANY STRUCTURE Banco Popular, Banco Popular, Illinois, Banco Popular (California), Banco Popular (Florida), Banco Popular (Texas) and Banco Popular, FSB are subject to restrictions under federal law that limit the transfer of funds between them and the Corporation, PIB, PNA, BPNA and the Corporation's other non-banking subsidiaries, whether in the form of loans, other extensions of credit, investments or asset purchases. Such transfers by Banco Popular, Banco Popular, Illinois, Banco Popular (California), Banco Popular (Florida), Banco Popular (Texas) or Banco Popular, FSB, respectively, to the Corporation, PIB, PNA or BPNA as the case may be, or to any one non-banking subsidiary, are limited in amount to 10% of the transferring institution's capital stock and surplus and, with respect to the Corporation and all of its non-banking subsidiaries, to an aggregate of 20% of the transferring institution's capital stock and surplus. Furthermore, such loans and extensions of credit are required to be secured in specified amounts. Under the Federal Reserve Board policy, a bank holding company such as the Corporation, PIB, PNA or BPNA is expected to act as a source of financial strength to each of its subsidiary banks and to commit resources to support each subsidiary bank. This support may be required at times when, absent such policy, the bank holding company might not otherwise provide such support. In addition, any capital loans by a bank holding company to any of its subsidiary depository institutions are subordinated in right of payment to deposits and to certain other indebtedness of such subsidiary depository institution. In the event of a bank holding company's bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary depository institution will be assumed by the bankruptcy trustee and entitled to a priority of payment. Banco Popular, Banco Popular, Illinois, Banco Popular (California), Banco Popular (Florida), Banco Popular (Texas) and Banco Popular, FSB are currently the only depository institutions of the Corporation, PIB, PNA and BPNA. Because the Corporation, PIB, PNA and BPNA are holding companies, their right to participate in the assets of any subsidiary upon the latter's liquidation or reorganization will be subject to the prior claims of the subsidiary's creditors (including depositors in the case of subsidiary depository institutions) except to the extent that the Corporation, PIB, PNA or BPNA as the case may be, may itself be a creditor with recognized claims against the subsidiary. Under the Federal Deposit Insurance Act (the "FDIA"), a depository institution (which term includes both banks and savings associations), the deposits of which are insured by the FDIC, can be held liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC in connection with (i) the default of a commonly controlled FDIC-insured depository institution or (ii) any assistance provided by the FDIC to any commonly controlled FDIC-insured depository institution "in danger of default". "Default" is defined generally as the appointment of a conservator or a receiver and "in danger of default" is defined generally as the existence of certain conditions indicating that a default is likely to occur in the absence of regulatory assistance. Banco Popular, Banco Popular, Illinois, Banco Popular (California), Banco Popular (Florida), Banco Popular (Texas) and Banco Popular, FSB are all currently FDIC-insured depository institutions of the Corporation. In some circumstances (depending upon the amount of the loss or anticipated loss suffered by the FDIC), cross-guarantee liability may result in the ultimate failure or insolvency of one or more insured depository institutions in a holding company structure. Any obligation or liability owed by a subsidiary depository institution to its parent company is subordinated to the subsidiary bank's cross-guarantee liability with respect to commonly controlled insured depository institutions. DIVIDEND RESTRICTIONS The principal regular source of cash flow for the Corporation is dividends from Banco Popular. Various statutory provisions limit the amount of dividends Banco Popular can pay to the Corporation without regulatory approval. As a member bank subject to the regulation of the Federal Reserve Board, Banco Popular must obtain the approval of the Federal Reserve Board for any dividend if the total of all dividends declared by the member bank in any calendar year would exceed the total of its net profits, as defined by the 6 7 Federal Reserve Board, for that year, combined with its retained net profits for the preceding two years. In addition, a member bank may not pay a dividend in an amount greater than its undivided profits then on hand after deducting its losses and bad debts. For this purpose, bad debts are generally defined to include the principal amount of loans that are in arrears with respect to interest by six months or more unless such loans are fully secured and in the process of collection. Moreover, for purposes of this limitation, a member bank is not permitted to add the balance in its allowance for loan losses account to its undivided profits then on hand. A member bank may, however, net the sum of its bad debts as so defined against the balance in its allowance for loan losses account and deduct from undivided profits only bad debts as so defined in excess of that account. At December 31, 1997, Banco Popular could have declared a dividend of approximately $257.7 million without the approval of the Federal Reserve Board. Illinois law contains similar limitations on the amount of dividends that Banco Popular, Illinois can pay and the National Bank Act contains similar limitations, on the amount of dividends Banco Popular (California), Banco Popular (Florida) and Banco Popular (Texas) can pay. In addition, OTS regulations limit the amount of capital distributions (whether by dividend or otherwise) that any savings association may make without prior OTS approval, based upon the savings association's regulatory capital levels. These limitations are applicable to Banco Popular, FSB. Also, in connection with the acquisition by Banco Popular, FSB, from the RTC of four New Jersey branches of the former Carteret Federal Savings Bank, the RTC provided Banco Popular, FSB and the Corporation interim financial assistance. The loan is secured with the issued and outstanding shares of common stock of Banco Popular, FSB. Pursuant to the terms of such financing, evidenced by a promissory note (which matures on January 20, 2000 but is prepayable any time before then), Banco Popular, FSB may not, among other things, declare or pay any dividends on its outstanding capital stock (unless such dividends are used exclusively for payment of principal of or interest on such promissory note) or make any distributions of its assets until payment in full of such promissory note. The payment of dividends by Banco Popular, Banco Popular, Illinois, Banco Popular (California), Banco Popular (Florida), Banco Popular (Texas) or Banco Popular, FSB may also be affected by other regulatory requirements and policies, such as the maintenance of adequate capital. If, in the opinion of the applicable regulatory authority, a depository institution under its jurisdiction is engaged in, or is about to engage in, an unsafe or unsound practice (that, depending on the financial condition of the depository institution, could include the payment of dividends), such authority may require, after notice and hearing, that such depository institution cease and desist from such practice. The Federal Reserve Board has issued a policy statement that provides that insured banks and bank holding companies should generally pay dividends only out of current operating earnings. In addition, all insured depository institutions are subject to the capital-based limitations required by the FDICIA. See "FDICIA". See "Puerto Rico Regulation" for a description of certain restrictions on Banco Popular's ability to pay dividends under Puerto Rico law. FDIC INSURANCE ASSESSMENTS Banco Popular, Banco Popular, Illinois, Banco Popular (California), Banco Popular (Florida), Banco Popular (Texas) and Banco Popular, FSB are subject to FDIC deposit insurance assessments. Pursuant to FDICIA, the FDIC has adopted a risk-based assessment system, under which the assessment rate for an insured depository institution varies according to the level of risk incurred in its activities. An institution's risk category is based partly upon whether the institution is well capitalized, adequately capitalized or less than adequately capitalized. Each insured depository institution is also assigned to one of the following "supervisory subgroups": "A", "B" or "C". Group "A" institutions are financially sound institutions with only a few minor weaknesses; Group "B" institutions are institutions that demonstrate weaknesses that, if not corrected, could result in significant deterioration; and Group "C" institutions are institutions for which there is a substantial probability that the FDIC will suffer a loss in connection with the institution unless effective action is taken to correct the areas of weakness. The FDIC reduced the insurance premiums it charges on bank deposits insured by the Bank Insurance Fund ("BIF") to the statutory minimum of $2,000.00 for "well capitalized" banks, effective January 1, 1996. On September 30, 1996, the Deposit Insurance Funds Act of 1996 ("DIFA") was enacted and signed into law. DIFA repealed the statutory minimum premium, and currently premiums related to deposits assessed by both the BIF and the Savings Association Insurance Fund ("SAIF") are to be assessed at a rate of between 0 cents and 27 cents per $100.00 of deposits. DIFA also provided for a special one-time assessment imposed on deposits insured by the SAIF to recapitalize the SAIF to bring the SAIF up to statutory required levels. 7 8 DIFA also separated, effective January 1, 1997, the Financing Corporation ("FICO") assessment to service the interest on its bond obligations from the BIF and SAIF assessments. The amount assessed on individual institutions by the FICO will be in addition to the amount, if any, paid for deposit insurance according to the FDIC's risk-related assessment rate schedules. FICO assessment rates for the first semiannual period of 1997 were set at 1.30 basis points annually for BIF-assessable deposits and 6.48 basis points annually for SAIF-assessable deposits. (These rates may be adjusted quarterly to reflect changes in assessment bases for the BIF and the SAIF. By law, the FICO rate on BIF-assessable deposits must be one-fifth the rate on SAIF-assessable deposits until the insurance funds are merged or until January 1, 2000, whichever occurs first). As of December 31, 1997, the Corporation had a BIF deposit assessment base of approximately $11.0 billion and a SAIF deposit assessment base of approximately $226 million. BROKERED DEPOSITS FDIC regulations adopted under FDICIA govern the receipt of brokered deposits. Under these regulations, a bank cannot accept, roll over or renew brokered deposits (which term is defined also to include any deposit with an interest rate more than 75 basis points above prevailing rates) unless (i) it is well capitalized or (ii) it is adequately capitalized and receives a waiver from the FDIC. A bank that is adequately capitalized may not pay an interest rate on any deposits in excess of 75 basis points over certain prevailing market rates specified by regulation. There are no such restrictions on a bank that is well capitalized. The Corporation does not believe the brokered deposits regulation has had or will have a material effect on the funding or liquidity of Banco Popular, Banco Popular, Illinois, Banco Popular (California), Banco Popular (Florida), Banco Popular (Texas) or Banco Popular, FSB. CAPITAL ADEQUACY Information about the capital composition of the Corporation as of December 31, 1997 and for the four previous years is presented in Table I "Capital Adequacy Data", on page F-17 in the "Management Discussion and Analysis of Financial Condition and Results of Operations" (the "MD&A") and is incorporated herein by reference. Under the Federal Reserve Board's risk-based capital guidelines for bank holding companies and member banks, the minimum guidelines for the ratio of qualifying total capital ("Total capital") to risk-weighted assets (including certain off-balance sheet items, such as standby letters of credit) is 8%. At least half of the Total capital is to be comprised of common equity, retained earnings, minority interest in unconsolidated subsidiaries, non-cumulative perpetual preferred stock and a limited amount of cumulative perpetual preferred stock, less goodwill, and certain other intangible assets discussed below ("Tier 1 Capital"). The remainder may consist of a limited amount of subordinated debt, other preferred stock, certain other instruments and a limited amount of loan and lease loss reserves ("Tier 2 Capital"). The Federal Reserve Board has adopted regulations that require most intangibles, including core deposit intangibles, to be deducted from Tier 1 Capital. The regulations, however, permit the inclusion of a limited amount of intangibles related to purchased mortgage servicing rights, purchased credit card relationships and include a "grandfather" provision permitting the continued inclusion of certain existing intangibles. In addition, the Federal Reserve Board has established minimum leverage ratio guidelines for bank holding companies and member banks. These guidelines provide for a minimum ratio of Tier 1 Capital to total assets, less goodwill and certain other intangible assets discussed below (the "leverage ratio") of 3% for bank holding companies and member banks that meet certain specified criteria, including that they have the highest regulatory rating. All other bank holding companies and member banks will be required to maintain a leverage ratio of 3% plus an additional cushion of at least 100 to 200 basis points. The guidelines also provide that banking organizations experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels, without significant reliance on intangible assets. Furthermore, the guidelines indicate that the Federal Reserve Board will continue to consider a "tangible Tier 1 leverage ratio" and other indicia of capital strength in evaluating proposals for expansion or new activities. The tangible Tier 1 leverage ratio is the ratio of a banking organization's Tier 1 Capital less all intangibles, to total assets less all intangibles. Banco Popular is subject to the risk-based and leverage capital requirements adopted by the Federal Reserve Board. See Consolidated Financial Statements, Note 19 "Regulatory Capital Requirements" on page F-60 of the MD&A, for the capital ratios of the Corporation and of Banco Popular. 8 9 Banco Popular, Illinois, Banco Popular (California), Banco Popular (Florida), Banco Popular (Texas) and Banco Popular, FSB are subject to similar capital requirements adopted by the FDIC, the OCC and the OTS, respectively. Failure to meet capital guidelines could subject a bank to a variety of enforcement remedies, including the termination of deposit insurance by the FDIC, and to certain restrictions on its business. See "FDICIA". Interstate Banking Legislation The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 permits bank holding companies, with Federal Reserve Board approval, to acquire banks located in states other than the holding company's home state, generally without regard to whether the transaction is prohibited under state law. In addition, commencing June 1, 1997, national and state banks with different home states were permitted to merge across state lines, with approval of the appropriate federal banking agency, unless the home state of a participating bank passed legislation prior to May 31, 1997 expressly prohibiting interstate mergers. States may permit de novo interstate branching. Once a bank has established branches in a state through an interstate merger transaction, the bank may establish and acquire additional branches at any location in the state where any bank involved in the interstate merger transaction could have established or acquired branches under applicable federal or state law. A bank that has established a branch in a state through de novo branching may establish and acquire additional branches in such state in the same manner and to the same extent as a bank having a branch in such state as a result of an interstate merger. If a state opted out of interstate branching within the specified time period, no bank in any other state may establish a branch in the state which has opted out, whether through an acquisition or de novo. A foreign bank, like Banco Popular, may branch interstate by merger or de novo to the same extent as domestic banks in the foreign bank's home state, which, in the case of Banco Popular, is New York. Various other legislation, including proposals to overhaul the bank regulatory system, expand bank and bank holding company powers and limit the investments that a depository institution may make with insured funds, is from time to time introduced in Congress. The Corporation, PIB, PNA and BPNA cannot determine the ultimate effect that such potential legislation, if enacted, or implementing regulations, would have upon their financial condition or results of operations. Puerto Rico Regulation General As a commercial bank organized under the laws of Puerto Rico, Banco Popular is subject to the supervision, examination and regulation by the Office of the Commissioner of Financial Institutions of Puerto Rico (the "Office of the Commissioner"), pursuant to the Puerto Rico Banking Act of 1933, as amended (the "Banking Law"). Section 27 of the Banking Law requires that at least ten percent (10%) of the yearly net income of Banco Popular be credited annually to a reserve fund. This apportionment shall be done every year until the reserve fund shall be equal to the total of paid-in capital on common and preferred stock. At the end of its most recent fiscal year, Banco Popular had a fund established in compliance with these requirements. Section 27 of the Banking Law also provides that when the expenditures of a bank are greater than the receipts, the excess of the former over the latter shall be charged against the undistributed profits of the bank, and the balance, if any, shall be charged against the reserve fund, as a reduction thereof. If there is no reserve fund sufficient to cover such balance in whole or in part, the outstanding amount shall be charged against the capital account and no dividend shall be declared until said capital has been restored to its original amount and the reserve fund to 20% of the original capital. Section 16 of the Banking Law requires every bank to maintain a legal reserve that, except as otherwise provided by the Office of the Commissioner, shall not be less than 20% of its demand liabilities, excluding government deposits (federal, state and municipal) which are secured by actual collateral. Furthermore, if a bank is authorized to establish one or more bank branches in a State of the United States or in a foreign country, where such branches are subject to the reserve requirements of that state or country, the Office of the Commissioner may exempt said branch or branches of the reserve requirements of Section 16. However, since Banco Popular is a member of the Federal Reserve System, it has been exempted from such requirements, with respect to deposits payable in Puerto Rico, 9 10 pursuant to an order of the Board of Governors of the Federal Reserve System dated November 24, 1982. The reserve requirements of Section 16 apply to those deposits. Section 17 of the Banking Law permits Banco Popular to make loans to any one person, firm, partnership or corporation, up to an aggregate amount of fifteen percent (15%) of the paid-in capital and reserve fund of the Bank. As of December 31, 1997, the legal lending limit for the Bank under this provision was approximately $106 million. If such loans are secured by collateral worth at least twenty-five percent (25%) more than the amount of the loan, the aggregate maximum amount may reach one third of the paid-in capital of the Bank, plus its reserve fund. There are no restrictions under Section 17 on the amount of loans that are wholly secured by bonds, securities and other evidence of indebtedness of the Government of the United States or Puerto Rico, or by current debt bonds, not in default, of municipalities or instrumentalities of Puerto Rico. Section 14 of the Banking Law authorizes Banco Popular to conduct certain financial and related activities directly or through subsidiaries, including finance leasing of personal property, making and servicing mortgage loans and operating a small loan company. Banco Popular engages in these activities through its wholly-owned subsidiaries, Popular Leasing & Rental, Inc., Popular Mortgage, Inc. and Popular Finance Inc, respectively, all of which are organized and operate in Puerto Rico. The Finance Board, which is a part of the Office of the Commissioner, but also includes as its members the Secretary of the Treasury, the Secretary of Commerce, the Secretary of Consumer Affairs, the President of the Planning Board, and the President of the Government Development Bank for Puerto Rico, has the authority to regulate the maximum interest rates and finance charges that may be charged on loans to individuals and unincorporated businesses in Puerto Rico. The current regulations of the Finance Board provide that the applicable interest rate on loans to individuals and unincorporated businesses (including real estate development loans but excluding certain other personal and commercial loans secured by mortgages on real estate properties) is to be determined by free competition. The Finance Board also has authority to regulate the maximum finance charges on retail installment sales contracts, which are currently set at 21%, and for credit card purchases, which are currently set at 26%. There is no maximum rate set for installment sales contracts involving motor vehicles, commercial, agricultural and industrial equipment, commercial electric appliances and insurance premiums. On March 4, 1998, legislation was approved in the U.S. House of Representatives (the "Political Status Act"), proposing a mechanism to settle permanently the political relationship between Puerto Rico and the United States, either through full self-government (e.g. statehood or independence, including as an alternative, free association via a bilateral treaty) or continued Commonwealth status. Under the proposed legislation, failure to settle on full self-government after completion of the referenda process provided therein would result in retention of the current Commonwealth status. It is not possible at this time to predict when the Political Status Act will be voted on by the Senate of the U.S. and whether is will be subsequently enacted into law. A change in the political status of Puerto Rico could result in modifications to or elimination of the Puerto Rico laws providing favorable tax treatment for certain investment securities such as U.S. Treasury Notes, GNMAs, etc. It is not possible to predict to what extent any adverse effects of such a change in political status would be offset by possible beneficial economic changes resulting from a change in political status, nor the transition period which would be provided after completion of the referenda process if the Political Status Act becomes law. IBC Act Under the IBC Act, without the prior approval of the Office of the Commissioner, PIB may not amend its articles of incorporation or issue additional shares of capital stock or other securities convertible into additional shares of capital stock unless such shares are issued directly to the shareholders of PIB previously identified in the application to organize the international banking entity, in which case notification to the Office of the Commissioner must be given within ten business days following the date of the issue. Pursuant to the IBC Act, without the prior approval of the Office of the Commissioner, PIB may not initiate the sale, encumbrance, assignment, merger or other transfer of shares if by such transaction a person or persons acting in concert could acquire direct or indirect control of 10% or more of any class of the Company's stock. Such authorization must be requested at least 30 days prior to the transaction. PIB must submit to the Office of the Commissioner a report of its condition and results of operation on a quarterly basis and its annual audited financial statement at the close of its fiscal year. Under the IBC Act, PIB may not deal with "domestic persons" as such term is defined in the IBC Act. Also, it may only engage in those activities authorized in the IBC Act, the regulations adopted thereunder and its license. 10 11 The IBC Act empowers the Office of the Commissioner to revoke or suspend, after a hearing, the license of an international banking entity if, among other things, it fails to comply with the IBC Act, regulations issued by the Office of the Commissioner or the terms of its license or if the Office of the Commissioner finds that the business of the international banking entity is conducted in a manner not consistent with the public interest. Employees At December 31, 1997, the Corporation employed 8,854 persons. None of its employees are represented by a collective bargaining group. ITEM 2. PROPERTIES As of December 31, 1997, Banco Popular owned (and wholly or partially occupied) approximately 76 branch premises and other facilities throughout the Commonwealth and branch premises in New York. In addition, as of such date, Banco Popular leased properties for branch operations in approximately 133 locations in Puerto Rico, 16 locations in New York and 7 locations in the U.S. Virgin Islands. The Corporation's management believes that each of its facilities is well-maintained and suitable for its purpose. The principal properties owned by the Corporation for banking operations and other services are described below: Popular Center, the metropolitan area headquarters building, located at 209 Munoz Rivera Avenue, Hato Rey, Puerto Rico, a 20 story office building. Approximately 55% of the office space is leased to outside tenants. Cupey Center Complex, three buildings, one of three stories, and two of two stories each, located at Cupey, Rio Piedras, Puerto Rico. The computer center, operational and support services, and a recreational center for employees are some of the main activities conducted at these facilities. The facilities are fully occupied by Banco Popular's personnel. Stop 22 - Santurce building, a twelve story structure located in Santurce, Puerto Rico. A branch, the accounting department, the human resources division and the auditing department are the main activities conducted located at this facility, which is fully occupied by Banco Popular's personnel. San Juan building, a twelve story structure located at Old San Juan, Puerto Rico. Banco Popular occupies approximately 40% of the building for a branch operation, a regional office, an exhibit room and other facilities. The rest of the building is rented to outside tenants. Mortgage Loan Center, a six story building, a four story building, and a one story building, located at 153, 167 and 157 Ponce de Leon Avenue, Hato Rey, Puerto Rico, respectively, are fully occupied by the mortgage loans and mortgage servicing departments. New York building, a nine story structure with two underground levels located at 7 West 51st. Street, New York City, where approximately 92% of the office space is used for banking operations. The remaining space is rented or available for rent to outside tenants. Banco Popular, Illinois, a three story building located at 4000-4008 West North Avenue, Chicago, Illinois. A full service branch of Banco Popular, Illinois, the executive offices, the human resources division and the bank's operation department, are the main activities conducted at this facility. Banco Popular (Florida), a two story building located at 5551 Vanguard Street, Orlando, Florida. Credit cards operations, finance and accounting department and the bank's operation services are the main activities conducted at this facility. Banco Popular (Texas), a one story building located at 1615 Little York Road, Houston, Texas. A full service branch of Banco Popular (Texas) and the administrative offices are located at this facility. ITEM 3. LEGAL PROCEEDINGS The Corporation and its subsidiaries are defendants in various lawsuits arising in the ordinary course of business. Management believes, based on the opinion of legal counsel, that the aggregate liabilities, if any, arising from such actions would not have a material adverse effect on the financial position of the Corporation. 11 12 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Corporation's common stock (the "Common Stock") is traded on the National Association of Securities Dealers Automated Quotation (NASDAQ) National Market System under the symbol BPOP. Information concerning the range of high and low sales prices for the Corporation's common shares for each quarterly period during 1997 and the previous four years, as well as cash dividends declared is contained under Table J, "Common Stock Performance", on page F-18 and under the caption "Stockholders' Equity" on page F-16 in the MD&A, and is incorporated herein by reference. At the annual meeting of stockholders on April 25, 1997, the Corporation's shareholders approved amendments to the Corporation's Restated Articles of Incorporation to increase the total number of authorized shares of capital stock to 190,000,000. The authorized capital stock of the Corporation consists of 180,000,000 shares of Common Stock, par value of $6.00 per share, and 10,000,000 shares of Preferred Stock without par value. Information concerning legal or regulatory restrictions on the payment of dividends by the Corporation and Banco Popular is contained under the caption "Regulation and Supervision" in Item 1 herein. As of February 27, 1998, the Corporation had 6,044 stockholders of record of its Common Stock, not including beneficial owners whose shares are held in record names of brokers or other nominees. The last sales price for the Corporation's Common Stock on such date, as quoted on the NASDAQ was $52.28 per share. The Corporation currently has outstanding $125 million subordinated notes due December 15, 2005 with interest payable semi-annually at 6.75%. These notes are unsecured subordinated obligations which are subordinated in right of payment in full to all present and future senior indebtedness of the Corporation. These notes do not provide for any sinking fund. On February 1997, BanPonce Trust I, a statutory business trust created under the laws of the State of Delaware, that is wholly-owned by PNA and indirectly wholly-owned by the Corporation, through certain underwriters, sold to institutional investors $150 million of its 8.327% Capital Securities Series A. These capital securities qualify as Tier I capital and are fully and unconditionally guaranteed by the Corporation. On May 8, 1997, the Board of Directors of the Corporation approved a stock repurchase program which allows the Corporation to repurchase in the open market, at such times and prices as market condition shall warrant, up to three million shares of its outstanding common stock. As of December 31, 1997, the Corporation had purchased 988,800 shares under this program for a total cost of $39.6 million. On May 23, 1997, a shelf registration was filed with the Securities and Exchange Commission, allowing the Corporation to issue medium-term notes, unsecured debt securities and preferred stock in an aggregate amount of up to $1 billion. These securities are guaranteed by the Corporation. As of December 31, 1997, the Corporation had issued $230 million in medium-term notes under that shelf registration. The Puerto Rico Income Tax Act of 1954, as amended, generally imposes a withholding tax on the amount of any dividends paid by corporations to individuals, whether residents of Puerto Rico or not, trusts, estates and special partnerships at a special 10% withholding tax rate. If the recipient is a foreign corporation or partnership not engaged in trade or business within Puerto Rico the withholding tax is also 10%. Prior to the first dividend distribution for the taxable year, individuals who are residents of Puerto Rico may elect to be taxed on the dividends at the regular rates, in which case the special 10% tax will not be withheld from such year's distributions. United States citizens who are non-residents of Puerto Rico will not be subject to Puerto Rico tax on dividends if said individual's gross income from sources within Puerto Rico during the taxable year does not exceed $1,300 if single, or $3,000 if married, and form AS 2732 of the Puerto Rico Treasury Department "Withholding Tax Exemption Certificate for the Purpose of Section 1147", is filed with the withholding agent. 12 13 U.S. income tax law permits a credit against U.S. income tax liability, subject to certain limitations, for certain foreign income taxes paid or deemed paid with respect to such dividends. ITEM 6. SELECTED FINANCIAL DATA The information required by this item appears in Table B, "Selected Financial Data" on pages F-4 and F-5 and the text under the caption "Earnings Analysis", on page F-7 in the MD & A, and is incorporated herein by reference. The Corporation's ratio of earnings to fixed charges on a consolidated basis for each of the last five years is as follows:
Year ended December 31, ----------------------- Ratio of Earnings to Fixed Charges: 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Excluding Interest on Deposits 1.8 2.0 2.0 2.6 3.0 Including Interest on Deposits 1.4 1.4 1.4 1.5 1.5 Ratio of Earnings to Fixed Charges and Preferred Stock Dividends: Excluding Interest on Deposits 1.8 2.0 2.0 2.5 3.0 Including Interest on Deposits 1.4 1.4 1.4 1.5 1.5
For purposes of computing these consolidated ratios, earnings represent income before income taxes, plus fixed charges. Fixed charges represent all interest expense (ratios are presented both excluding and including interest on deposits), the portion of net rental expense which is deemed representative of the interest factor and the amortization of debt issuance expense. The Corporation's long-term senior debt and preferred stock on a consolidated basis for each of the last five years ended December 31, is as follows:
Year ended December 31, ----------------------- (In thousands) 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Long-term obligations $1,678,696 $1,111,713 $885,428 $489,524 $283,855 Non-Cumulative preferred stock of the Corporation 100,000 100,000 100,000 100,000 -0- Cumulative perpetual preferred stock of Banco Popular -0- -0- -0- -0- 11,000
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this item appears on page F-2 through F-36 in the MD&A, and is incorporated herein by reference. Table L, "Maturity Distribution of Earning Assets", on page F-23 in the MD&A, has been prepared on the basis of contractual maturities. The Corporation does not have a policy with respect to rolling over maturing loans, but rolls over loans only on a case-by-case basis after review of such loans in accordance with the Corporation's lending criteria. 13 14 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information regarding the market risk of the Corporation appears on pages F-19 through F-22 in the MD&A, under the caption "Market Risk" and is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this item appears on pages F-37 through F-84, and on page F-34 under the caption "Statistical Summary - Quarterly Financial Data", in the MD&A and is incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information contained under the captions "Shares Beneficially Owned by Directors, Nominees and Executive Officers of the Corporation", "Section 16(a) Beneficial Ownership Reporting Compliance" and "Board of Directors and Committees" including the "Nominees for Election as Directors" and "Executive Officers" of the Corporation's definitive proxy statement filed with the Securities and Exchange Commission on or about March 18, 1998 (the "Proxy Statement"), is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information under the caption "Executive Compensation Program", and under the caption "Popular, Inc. Performance Graphs" of the Proxy Statement, is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information under the captions "Principal Stockholders" and under "Shares Beneficially Owned by Directors, Nominees and Executive Officers of the Corporation" of the Proxy Statement, is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information under the caption "Family Relationships" and "Other relationships and transactions" of the Proxy Statement, is incorporated herein by reference. 14 15 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K A. The following documents are part of this report and appear on the pages indicated.
(1) Financial Statements: Report of Independent Accountants ................................................................... F-37 Consolidated Statements of Condition as of December 31, 1997 and 1996 ............................... F-38 Consolidated Statements of Income for each of the years in the three-year period ended December 31, 1997 .............................................................................. F-39 Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 1997 .............................................................................. F-40 Consolidated Statements of Changes in Stockholders' Equity for each of the years in the three-year period ended December 31, 1997 ...................................................... F-41 Notes to Consolidated Financial Statements .......................................................... F-42 (2) Financial Statement Schedules: No schedules are presented because the information is not applicable or is included in the Consolidated Financial Statements described in A.1 above or in the notes thereto. (3) Exhibits The exhibits listed on the Exhibits Index on page 17 of this report are filed herewith or are incorporated herein by reference.
B. The Corporation filed one report on Form 8-K during the quarter ended December 31, 1997. Dated: October 7, 1997 Items reported: Item 5 - Other Events Item 7 - Financial Statements and Exhibits 15 16 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. POPULAR, INC. ------------- (Registrant) By: /s/ RICHARD L. CARRION ------------------------------- Richard L. Carrion Chairman of the Board, President and Chief Executive Officer Dated: 02-12-98 (Principal Executive Officer) -------------- By: /S/JORGE A. JUNQUERA ------------------------------- Jorge A. Junquera Senior Executive Vice President Dated: 02-12-98 (Principal Financial Officer) -------------- By: /s/AMILCAR L. JORDAN ------------------------------- Amilcar L. Jordan Senior Vice President Dated: 02-12-98 (Principal Accounting Officer) -------------- Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /S/RICHARD L. CARRION Chairman of the Board, - ---------------------------- President and Chief Richard L. Carrion Executive Officer 02-12-98 -------- /S/ALFONSO F. BALLESTER Vice Chairman of - ---------------------------- the Board Alfonso F. Ballester 02-12-98 -------- - ---------------------------- Vice Chairman of Antonio Luis Ferre the Board -------- /S/SALUSTIANO ALVAREZ MENDEZ - ---------------------------- Salustiano Alvarez Mendez Director 02-12-98 -------- /S/JUAN J. BERMUDEZ - ---------------------------- Juan J. Bermudez Director 02-12-98 -------- /S/FRANCISCO J. CARRERAS - ---------------------------- Francisco J. Carreras Director 02-12-98 -------- /S/DAVID H. CHAFEY, JR. - ---------------------------- David H. Chafey, Jr. Director 02-12-98 -------- 16 17 /S/LUIS E. DUBON, JR. - ---------------------------- Luis E. Dubon, Jr. Director 02-12-98 -------- /S/HECTOR R. GONZALEZ - ---------------------------- Hector R. Gonzalez Director 02-12-98 -------- /S/JORGE A. JUNQUERA - ---------------------------- Jorge A. Junquera Director 02-12-98 -------- /S/MANUEL MORALES, JR. - ---------------------------- Manuel Morales, Jr. Director 02-12-98 -------- /S/ALBERTO M. PARACCHINI - ---------------------------- Alberto M. Paracchini Director 02-12-98 -------- /S/FRANCISCO M. REXACH, JR. - ---------------------------- Francisco M. Rexach, Jr. Director 02-12-98 -------- /S/J. ADALBERTO ROIG, JR. - ---------------------------- J. Adalberto Roig, Jr. Director 02-12-98 -------- - -------------------------- Felix J. Serralles, Jr. Director -------- /S/JULIO E. VIZCARRONDO, JR. - ---------------------------- Julio E. Vizcarrondo, Jr. Director 02-12-98 -------- 17 18 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION FOOTNOTE - -------------------------------------------------------------------------------------------------------------- 3.1 Restated Articles of Incorporation and By-Laws of Popular, Inc. 4.1 Form of certificate for common stock. (1a) 4.2 Certificates of Resolution of the Board of Directors of Popular, Inc. dated August 11, 1988 creating a series of Preferred Stock of the Corporation designated as Series A Participating Cumulative Preferred Stock Purchase rights and the designation and amount of such series, the voting power preferences, and relative, participating, optional, or other special rights of the shares of such series, and the qualifications, limitations or restrictions thereof. Rights Agreement dated as of August 11, 1988 by and between Popular, Inc. and Chemical Bank (as successor to Manufacturers Hanover Trust Company) regarding the issuance of certain Rights to the Corporation's shareholders ("Rights Agreement"). (2) 4.3 Amendment to Rights Agreement dated as of December 11, 1990. (3) 4.4 Indenture dated October 1, 1991, as supplemented by the First Supplemental Indenture thereto, dated February 28, 1995, each among Popular North America, Inc., Popular, Inc. and Guarantor, and Citibank, N.A., as Trustee, and as further supplemented by the Second Supplemental Indenture thereto, dated May 8, 1997, among Popular North America, Inc., Popular, Inc. and Guarantor, and The First National Bank of Chicago, as Trustee. (2a) 4.5 Form of medium-term fixed rate note of Popular North America, Inc. guaranteed by Popular, Inc. (2b) 4.6 Form of medium-term floating rate note of Popular North America, Inc. guaranteed by Popular, Inc. (2c) 4.7 Form of Certificate of 8.35% non-cumulative monthly Income Preferred Stock, 1994 Series A (Liquidation Preference $25.00 per share). (4) 4.8 Form S-3 filed in connection with the issuance of debt securities and preferred stock of Popular, Inc. and Popular International Bank, Inc. and Popular North America, Inc. guaranteed by Popular, Inc. in the aggregate amount of $1,000,000,000. (5) 4.8.1 Form S-3 filed in connection with the issuance of debt securities and preferred stock of Popular, Inc., and Popular International, Bank, Inc. and Popular North America, Inc. guaranteed by Popular, Inc. in the aggregate amount of $1,000,000,000. (5a) 4.9 Subordinated Indenture of Popular, Inc, dated November 30, 1995, between Popular, Inc. and the First National Bank of Chicago, as trustee, and related to 6 3/4% subordinated notes due December 15, 2005 in the aggregate amount of $125,000,000. (6) 4.10 Form of Subordinated Note of Popular, Inc. (7) 4.11 Indenture dated February 15, 1995, as supplemented by the First Supplemental Indenture thereto, dated May 8, 1997, each among Popular, Inc. and the First National Bank of Chicago, as Trustee. (8) 4.12 Form of medium-term fixed rate note of Popular, Inc. (9) 4.13 Form of medium-term floating rate note of Popular, Inc (10) 4.14 Form of Fixed Rate Medium-Term Note, Series 3 of Popular, Inc. (10a) 4.15 Form of Floating Rate Medium-Term Note, Series 3, of Popular, Inc. (10b) 4.16 Form of Fixed Rate Medium-Term Note, Series D, of Popular North America, Inc., endorsed with the guarantee of Popular, Inc. (10c) 4.17 Form of Floating Rate Medium-Term Note, Series D, of Popular North America, Inc., endorsed with the guarantee of Popular, Inc. (10d) 10.2 Form 8-A Filing filed in connection with the Series A Participating Cumulative Preferred Stock Purchase Rights. (11) 10.8 Management Incentive Plan for certain Division Supervisors approved in January, 1987. (12) 10.8.1 Popular, Inc. Senior Executive Long-Term Incentive Plan dated October 6, 1994. (13) 10.9 Stock Deferment Plan for outside directors effective on August 15, 1996. (14) 10.11 $85,785,000 Banco Popular de Puerto Rico 1992 Grantor Trust 1 Mortgage Pass - Through Certificates, Class A, offering memorandum dated June 25, 1992. Underwriting Agreement by and between Merrill Lynch, Pierce, Fenner & Smith, Incorporated acting through its Puerto Rico branch office and Lehman Brothers Puerto Rico, Inc. and Banco Popular de Puerto Rico dated June 25, 1992; Insurance Agreement by and between Municipal Bond Investors Assurance Corporation as Insurer, Banco Popular de Puerto Rico as Settlor, Banco Popular de Puerto Rico as Servicer, Banco Central as Collateral Agent and Banco Central as Trustee dated June 25, 1992. (15)
18 19 10.12.2 Revolving Credit and competitive advance facility and credit agreement by and between Popular, Inc. and Popular North America, Inc. and Chemical Bank, as agent bank, for borrowing up to the principal amount of $500,000,000 dated as of November 3, 1995. (16) 10.13 Banco Popular de Puerto Rico Bank's Note Program up to the aggregate amount of $600,000,000 executed on September 24, 1996. (17) 10.14 Popular North America, Inc., 6 3/4% Medium Term Notes, Series C, due August 9, 2001 in the aggregate principal amount of $75,000,000. (18) 12.0 Computation of Ratio of Earnings to Fixed Charges 13.1 Registrants Annual Report to Shareholders for the year ended December 31, 1997 21.1 Schedule of Subsidiaries 23.1 Consent of Independent Auditors 27.0 Financial Data Schedule (for SEC use only) 99.1 Registrant's Proxy Statement for the April 23, 1998 Annual Meeting of Stockholders
- - - - - - - - - - - - - - - - - - - - - - - - (1a) Incorporated by reference to exhibit 4.1 of the Corporation's Annual Report on Form 10-K for the year ended December 31, 1990 (the "1990 Form 10-K"). (2) Incorporated by reference to Exhibit 4.3 of Registration Statement No. 33-39028. (2a) Incorporated by reference to Exhibit 4 (f) of Registration Statement No. 333-26941. (2b) Incorporated by reference to Exhibit 2 on Form 8-K filed on October 8, 1991. (2c) Incorporated by reference to Exhibit 3 on Form 8-K filed on October 8, 1991. (3) Incorporated by reference to Exhibit 4.4 of Registration Statement No. 33-39028. (4) Incorporated by reference to Exhibit 4.7 of the 1994 Form 10-k. (5) Incorporated by reference to Registration Statement No. 33-61601. (5a) Incorporated by reference to Registration Statement No. 333-26941. (6) Incorporated by reference to Exhibit 4(e) on Form 8-K filed on December 13, 1995. (7) Incorporated by reference to Exhibit 4(p) on Form 8-K filed on December 13, 1995. (8) Incorporated by reference to Exhibit 4(d) of Registration Statement No. 333-26941. (9) Incorporated by reference to Exhibit 4(a) on Form 8-K filed on April 13, 1995. (10) Incorporated by reference to Exhibit 4(b) on Form 8-K filed on April 13, 1995. (10a) Incorporated by reference to Exhibit 4(1) of Form 8-K filed on June 11, 1997. (10b) Incorporated by reference to Exhibit 4(m) of Form 8-K filed on June 11, 1997. (10c) Incorporated by reference to Exhibit 4(n) of Form 8-K on June 11, 1997. (10d) Incorporated by reference to Exhibit 4(o) of Form 8-K filed on June 11, 1997. (11) Incorporated by reference to Exhibit number 10.2 of Registration Statement No. 33-00497. (12) Incorporated by reference to Exhibit 10.13 of the 1991 Form 10-K. (13) Incorporated by reference to Exhibit 10.8.1 of the 1994 Form 10-K. 19 20 (14) Incorporated by reference to Exhibit 10.9 of the 1996 Form 10-K. (15) Incorporated by reference to Exhibit 10.14 of the 1992 Form 10-K. (16) Incorporated by reference to Exhibit 10.12.2 of the 1994 Form 10-K. (17) Incorporated by reference to Exhibit 10.13 of the 1996 Form 10-K. (18) Incorporated by reference to Exhibit 10.14 of the 1996 Form 10-K. 20 21 POPULAR, INC. INDEX FINANCIAL DATA
Page FINANCIAL REVIEW AND SUPPLEMENTARY INFORMATION Management's Discussion and Analysis of Financial Condition and Results of Operations ..................................................................................... F-2 Statistical Summaries ...................................................................................... F-30 Glossary of Terms .......................................................................................... F-35 FINANCIAL STATEMENTS Report of Independent Accountants .......................................................................... F-37 Consolidated Statements of Condition as of December 31, 1997 and 1996 ...................................... F-38 Consolidated Statements of Income for each of the years in the three-year period ended December 31, 1997 ......................................................................................... F-39 Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 1997 ......................................................................................... F-40 Consolidated Statements of Changes in Stockholders' Equity for each of the years in the three-year period ended December 31, 1997 ............................................................................ F-41 Notes to Consolidated Financial Statements ................................................................. F-42
F-1 22 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This financial discussion contains an analysis of the consolidated financial position and financial performance of Popular, Inc. (formerly BanPonce Corporation) and its subsidiaries (the Corporation) and should be read in conjunction with the consolidated financial statements, notes and tables included elsewhere in this report. The Corporation is a bank holding company which offers a wide range of products and services through its subsidiaries and is engaged in the following businesses: - Commercial Banking/Savings and Loans - Banco Popular de Puerto Rico (BPPR), Banco Popular, N.A (California), Banco Popular, N.A. (Florida), Banco Popular, Illinois, Banco Popular, FSB and Banco Popular, N.A. (Texas) - Lease Financing - Popular Leasing and Rental, Inc. (Popular Leasing) and Popular Leasing, U.S.A. - Mortgage Banking/Consumer Finance - Popular Mortgage, Inc. (d/b/a Popular Home Mortgage), Equity One, Inc. (Equity One) and Popular Finance, Inc. (Popular Finance) - Broker/Dealer - Popular Securities, Incorporated (Popular Securities) - ATM Processing Services - ATH Costa Rica OVERVIEW During 1997, the U.S. economy expanded at a strong pace which reduced the unemployment rate to cyclical lows, but inflation continued its extraordinary performance. Gross domestic product increased 3.8% in 1997, which is a rate of growth considered by many economists to be above the economy's long-term potential growth rate. The unemployment rate declined to 4.7% in December 1997, as the economy generated 3.2 million new jobs. Despite the strong performance of the economy, inflation as measured by the Consumer Price Index, rose 1.7%, the lowest rate since 1986, which was affected to a large extent by a sharp drop in oil prices that year. Prices at the wholesale level actually reflected deflation, as the Producer Price Index declined 1.2% during 1997. Due to the strength of the economy, particularly early in the year, the Federal Reserve increased the federal funds rate by 25 basis points in March 1997, with the objective of prolonging the economic expansion and restraining possible inflationary pressures. Despite continued strong economic growth during the remainder of the year, monetary policy was kept unchanged. It is possible that increasing levels of productivity in the American economy together with intense competition in many markets due to the increasing globalization of many industries, discouraged any further changes in monetary policy. The financial markets incorporated this "new" approach to monetary policy in the yield curve, by reducing sharply the general level of interest rates during the last three quarters of the year. The yield of Treasury obligations maturing in two and thirty years declined to 5.65% and 5.92%, respectively. This decline was intensified by the financial crisis in Asia, which introduced expectations of a world-wide slowdown in economic growth. The Corporation's performance for 1997 was highlighted by the investment in crucial strategic initiatives aimed at creating shareholder value and increase earnings as well as successfully integrating the acquired operations. In the annual stockholders meeting on April 25, 1997, the Corporation's shareholders approved the change of the Corporation's name to Popular, Inc. as a corporate strategy of marketing and identification of its subsidiaries. As part of this strategy, the banking subsidiaries changed their name to Banco Popular and an institutional campaign was launched in the continental U.S. emphasizing the Bank's strength and history as well as its strong Hispanic ties. Other non-banking subsidiaries previously known as Puerto Rico Home Mortgage, BP Capital Markets and Popular Consumer Services (d/b/a Best Finance) changed their names to Popular Home Mortgage, Popular Securities and Popular Finance, respectively. In an effort to continue providing banking services at customers' convenience, BPPR launched its innovative "PC Bank" in Puerto Rico. This new product, which is available 24 hours a day, allows customers to obtain balances of their deposit accounts, credit cards and loans through their personal computer from the privacy of their home or office. Likewise, clients are able to verify their most recent transactions, perform payments and transfers within the accounts and communicate with the bank through electronic mail. During the second quarter of 1997, the Corporation acquired Seminole National Bank in Sanford, Florida. Seminole National Bank operated three branches in Sanford and Orlando. In Illinois, the Corporation acquired National Bancorp, Inc. and CBC Bancorp, Ltd. National Bancorp, Inc. was the holding company of American Midwest Bank and Trust, which operated two branches in Chicago, while CBC Bancorp had two banking subsidiaries, Capitol Bank & Trust and Capitol Bank of Westmont which operated three branches. Those three banking operations were subsequently consolidated with Banco Popular, Illinois. Moreover, in Puerto Rico, the Corporation completed the acquisition of Roig Commercial Bank (RCB) on June 30, 1997, with its branch F-2 23 TABLE A Components of Net Income as a Percentage of Average Total Assets
For the Year - ------------------------------------------------------------------------------------------------------------------------------ 1997 1996 1995 1994 1993 --------------------------------------------------------------- Net interest income ...................................... 4.26% 4.18% 4.14% 4.38% 4.61% Provision for loan losses ................................ (0.60) (0.54) (0.46) (0.44) (0.68) Securities and trading gains ............................. 0.03 0.02 0.05 0.01 Other income.............................................. 1.31 1.24 1.18 1.15 1.16 --------------------------------------------------------------- 5.00 4.90 4.91 5.09 5.10 Operating expenses........................................ (3.46) (3.33) (3.45) (3.66) (3.86) --------------------------------------------------------------- Net income before tax, dividends on preferred stock of BPPR and cumulative effect of accounting changes .... 1.54 1.57 1.46 1.43 1.24 Provision for income tax.................................. (0.40) (0.43) (0.42) (0.41) (0.26) --------------------------------------------------------------- Net income before dividends on preferred stock of BPPR and cumulative effect of accounting changes...................................... 1.14 1.14 1.04 1.02 0.98 Dividends on preferred stock of BPPR...................... (0.01) Cumulative effect of accounting changes................... 0.05 --------------------------------------------------------------- Net income................................................ 1.14% 1.14% 1.04% 1.02% 1.02% =============================================================== - ------------------------------------------------------------------------------------------------------------------------------
network of 25 branches mostly located in the eastern part of the island. In September, BPPR completed the integration of RCB branches and products. Eight branches were consolidated into existing BPPR branches and the remaining 17 are strengthening BPPR's retail network, particularly in the eastern end of the island, and are providing additional services and convenience to our customers. Also, during the second quarter, ATH Costa Rica began operations. It is the first automated teller machine (ATM) network in that country. ATH Costa Rica and three banking institutions in Costa Rica joined and currently operate 18 ATMs providing their customers with access to ATMs in Puerto Rico and the United States, and vice-versa. To enhance the Corporation's ability to secure financing in the U.S. money and capital markets a shelf registration was filed with the Securities and Exchange Commission. Under this registration, which became effective on May 22, 1997, the Corporation may issue unsecured debt securities or shares of preferred stock in an aggregate amount of up to $1 billion. As of December 31, 1997, the Corporation had issued $230 million in medium-term notes under this shelf registration. On December 1, 1997, the Corporation acquired Houston Bancorporation, the holding company of Citizens National Bank which operated one branch in Houston, Texas. This acquisition emphasizes the Corporation's objective to create a wide customer base in markets with a sizable Hispanic population in order to build a nationwide network and brand that will provide more convenience to its customers and growth opportunities for the Corporation. During 1997, other established operations of the Corporation continued expanding as Banco Popular, N.A. (Florida) opened three new branches during its first year, for a total of six branches in that state. As of December 31, 1997, in addition to the six branches in Florida, the Corporation operated 29 bank branches in New York, 13 in Illinois, eight in New Jersey, six in California and one in Texas, for a total of 63 branches in the continental U.S. In Puerto Rico and the Virgin Islands, BPPR opened five full-service branches and six in-store branches during this year, for a total of 209 branches, while Equity One opened 15 new offices in the mainland for a total of 117 offices in 30 states. BPPR continued to accomplish a significant progress towards its electronic initiatives as the number of POS transactions rose 51.3% from 3.2 million in December 1996 to 4.9 million in December 1997, while 4,929 POS terminals were installed during the year. F-3 24 TABLE B Selected Financial Data
----------------------------------------- (Dollars in thousands, except per share data) 1997 1996 1995 ----------------------------------------- CONDENSED INCOME STATEMENTS Interest income ........................................... $ 1,491,303 $ 1,272,853 $ 1,105,807 Interest expense .......................................... 707,348 591,540 521,624 ----------------------------------------- Net interest income .................................... 783,955 681,313 584,183 Securities and trading gains .............................. 6,202 3,202 7,153 Operating income .......................................... 241,396 202,270 166,185 Operating expenses ........................................ 636,920 541,919 486,833 Provision for loan losses ................................. 110,607 88,839 64,558 Income tax ................................................ 74,461 70,877 59,769 Dividends on preferred stock of BPPR ...................... Cumulative effect of accounting changes ................... ----------------------------------------- Net income ............................................. $ 209,565 $ 185,150 $ 146,361 ========================================= Net income applicable to common stock .................. $ 201,215 $ 176,800 $ 138,011 ========================================= PER COMMON SHARE DATA* Net income ................................................ $ 3.00 $ 2.68 $ 2.10 Dividends declared ........................................ 0.80 0.69 0.58 Book value ................................................ 20.73 17.59 15.81 Market price .............................................. 49.50 33.75 19.38 Outstanding shares: Average ............................................... 67,018,482 66,022,312 65,816,300 End of period ......................................... 67,682,704 66,088,506 65,897,272 AVERAGE BALANCES Net loans ................................................. $10,548,207 $ 9,210,964 $ 8,217,834 Earning assets ............................................ 17,409,634 15,306,311 13,244,170 Total assets .............................................. 18,419,144 16,301,082 14,118,183 Deposits .................................................. 10,991,557 10,461,796 9,582,151 Subordinated notes ........................................ 125,000 147,951 56,850 Total stockholders' equity ................................ 1,370,984 1,194,511 1,070,482 PERIOD END BALANCES Net loans ................................................. $11,376,607 $ 9,779,028 $ 8,677,484 Allowance for loan losses ................................. 211,651 185,574 168,393 Earning assets ............................................ 18,060,998 15,484,454 14,668,195 Total assets .............................................. 19,300,507 16,764,103 15,675,451 Deposits .................................................. 11,749,586 10,763,275 9,876,662 Subordinated notes ........................................ 125,000 125,000 175,000 Preferred beneficial interests in Popular North America's junior subordinated deferrable interest debentures guaranteed by the Corporation ........................... 150,000 Total stockholders' equity ................................ 1,503,092 1,262,532 1,141,697 SELECTED RATIOS Net interest yield (taxable equivalent basis) .............. 4.84% 4.77% 4.74% Return on average total assets ............................. 1.14 1.14 1.04 Return on average common stockholders' equity .............. 15.83 16.15 14.22 Dividend payout ratio to common stockholders ............... 25.19 24.63 26.21 Efficiency ratio ........................................... 62.12 61.33 64.88 Overhead ratio ............................................. 49.66 49.38 53.66 Tier I capital to risk-adjusted assets ..................... 12.17 11.63 11.91 Total capital to risk-adjusted assets ...................... 14.56 14.18 14.65
* Per share data is based on the average number of shares outstanding during the periods, except for the book value which is based on total shares at the end of the periods. All per share data has been adjusted to reflect two stock splits effected in the form of a dividend on July 1, 1996 and on April 3, 1989. F-4 25
Year ended December 31, - ----------------------------------------------------------------------------------------------------- 1994 1993 1992 1991 1990 1989 1988 - ----------------------------------------------------------------------------------------------------- $ 887,141 $ 772,136 $ 740,354 $ 794,943 $ 565,807 $ 558,273 $ 488,200 351,633 280,008 300,135 387,134 281,561 302,747 261,316 - ----------------------------------------------------------------------------------------------------- 535,508 492,128 440,219 407,809 284,246 255,526 226,884 451 1,418 625 19,376 91 2,529 689 140,852 123,762 123,879 112,398 70,865 59,550 53,025 447,846 412,276 366,945 345,738 229,563 207,376 190,862 53,788 72,892 97,633 121,681 53,033 42,603 34,750 50,043 28,151 14,259 6,793 9,240 11,456 7,844 385 770 770 807 6,185 - ----------------------------------------------------------------------------------------------------- $ 124,749 $ 109,404 $ 85,116 $ 64,564 $ 63,366 $ 56,170 $ 47,142 ===================================================================================================== $ 120,504 $ 109,404 $ 85,116 $ 64,564 $ 63,366 $ 56,170 $ 47,142 ===================================================================================================== $ 1.84 $ 1.67 $ 1.40 $ 1.07 $ 1.57 $ 1.40 $ 1.18 0.50 0.45 0.40 0.40 0.40 0.40 0.34 13.74 12.75 11.52 10.50 9.83 9.38 8.38 14.07 15.50 15.13 9.63 8.00 10.75 8.88 65,596,486 65,402,472 60,922,988 60,071,202 40,233,940 40,028,026 40,000,000 65,676,256 65,464,846 65,309,728 60,187,704 59,884,812 40,074,792 40,000,000 $ 7,107,746 $ 5,700,069 $ 5,150,328 $ 5,302,189 $ 3,377,463 $ 3,132,167 $ 2,869,829 11,389,680 9,894,662 8,779,981 8,199,195 5,461,938 5,318,800 5,182,535 12,225,530 10,683,753 9,528,518 8,944,357 5,836,749 5,676,981 5,523,823 8,837,226 8,124,885 7,641,123 7,198,187 5,039,422 4,782,791 4,571,456 56,082 73,967 85,585 94,000 50,000 38,082 119 924,869 793,001 668,990 610,641 407,611 353,844 317,001 $ 7,781,329 $ 6,346,922 $ 5,252,053 $ 5,195,557 $ 5,365,917 $ 3,276,389 $ 3,056,761 153,798 133,437 110,714 94,199 89,335 40,896 33,244 11,843,806 10,657,994 9,236,024 8,032,556 8,219,279 5,469,921 5,221,873 12,778,358 11,513,368 10,002,327 8,780,282 8,983,624 5,923,261 5,661,398 9,012,435 8,522,658 8,038,711 7,207,118 7,422,711 4,926,304 4,715,837 50,000 62,000 74,000 94,000 94,000 50,000 1,002,423 834,195 752,119 631,818 588,884 375,807 334,867 5.06% 5.50% 6.11% 5.97% 6.30% 5.57% 5.10% 1.02 1.02 0.89 0.72 1.09 0.99 0.85 13.80 13.80 12.72 10.57 15.55 15.87 14.87 27.20 25.39 28.33 34.13 25.33 28.14 28.00 66.21 66.94 65.05 66.46 64.65 65.82 68.19 57.24 58.34 55.07 52.47 55.80 56.86 60.45 12.85 12.29 12.88 11.01 10.10 9.47 9.19 14.25 13.95 14.85 13.35 12.74 11.76 10.10
F-5 26 TABLE C Changes in Net Income and Earnings per Common Share
1997 1996 1995 - -------------------------------------------------------------------------------------------------------------------------------- (In thousands, except per common share amounts) DOLLARS PER SHARE Dollars Per share Dollars Per share -------------------------------------------------------------------------- Net income applicable to common stock for prior year................................... $176,800 $2.68 $138,011 $2.10 $120,504 $1.84 Increase (decrease) from changes in: Net interest income.............................. 102,642 1.55 97,130 1.48 48,675 0.74 Other operating income........................... 39,126 0.59 36,085 0.55 25,333 0.38 Trading account profit........................... 3,826 0.06 (1,677) (0.03) 1,558 0.02 Gain on sale of investment securities............ (826) (0.01) (2,274) (0.03) 5,144 0.08 Dividends on preferred stock of BPPR............. 385 0.01 Income tax....................................... (3,584) (0.05) (11,108) (0.17) (9,726) (0.15) Provision for loan losses........................ (21,768) (0.33) (24,281) (0.37) (10,770) (0.16) Operating expenses............................... (95,001) (1.44) (55,086) (0.84) (38,987) (0.59) -------------------------------------------------------------------------- Subtotal......................................... 201,215 3.05 176,800 2.69 142,116 2.17 Dividends declared on preferred stock............ (4,105) (0.06) Change in average common shares* ................ (0.05) (0.01) (0.01) -------------------------------------------------------------------------- Net income applicable to common stock ............. $201,215 $3.00 $176,800 $2.68 $138,011 $2.10 ==========================================================================
* Reflects the effect of the issuance of shares of common stock for the acquisitions completed in 1997, net of the shares repurchased during 1997, plus the shares issued through the Dividend Reinvestment Plan in the years presented. The average common shares outstanding for the years presented above were 67,018,482 for 1997, 66,022,312 for 1996 and 65,816,300 for 1995, after restating for the stock split effected in the form of a dividend of one share for each share outstanding on July 1, 1996. Besides investing in strategic initiatives, the Corporation's net income was $209.6 million for 1997, showing a $24.4 million increase or 13.2% over the $185.2 million reported in 1996. Earnings per common share (EPS) for the year ended 1997 were $3.00, or 11.9% higher than the $2.68 reported for 1996. The Corporation's profitability ratios for 1997 represented returns of 1.14% on assets (ROA) and 15.83% on common stockholders' equity (ROE), compared with an ROA and ROE of 1.14% and 16.15%, respectively in 1996. Table A presents a five-year summary of the components of net income as a percentage of average assets. The earnings performance reflected an increase in net interest income of $102.6 million due to the growth of $2.1 billion in the average volume of earning assets, driven by a $1.3 billion increase in average loans, as well as a higher fully taxable equivalent net interest margin of 4.84%, up from 4.77% in 1996. Significant growth was also experienced in several other operating income categories such as service charges on deposit accounts which grew $8.3 million, other service fees which increased $21.6 million, trading account profit which grew $3.8 million and other operating income which increased $9.3 million. These factors served to offset the impact of increases of $21.8 million in the provision for loan losses and $95.0 million in operating expenses. The provision for loans losses rose $21.8 million from $88.8 million in 1996 to $110.6 million in 1997 as a result of the growth in the loan portfolio, and higher delinquency and net charge-offs. Net charge-offs rose from $72.1 million or 0.78% of average loans in 1996 to $97.8 million or 0.93% of average loans in 1997, particularly in the consumer and commercial loan portfolios. This increase is due to the recent deterioration in the credit conditions highlighted by the rise in personal bankruptcies. In Puerto Rico, the number of personal bankruptcies filed during 1997 amounted to 15,636 for a 44.9% increase over the 10,792 filed in 1996. Operating expenses totaled $636.9 million in 1997, as compared with $541.9 million in 1996, reflecting rises of $33.6 million in personnel expenses, $9.3 million in equipment expenses, $7.3 million in business promotion and $9.9 million in other operating expenses. The increase in operating expenses was attributed to increased staffing resulting from acquisitions and strategic initiatives, growth of the Corporation's business activities, increased spending on projects to enhance revenue growth as well as optimizing product delivery channels. In addition, operating expenses for 1997 include some costs pertaining to the Year 2000. The Corporation has approached this project creating a company-wide task force and establishing a formal plan, closely monitored by its Senior Management. F-6 27 Total assets at December 31, 1997, amounted to $19.3 billion, including $18.1 billion of interest earning assets of which $11.4 billion were loans. These amounts compare with $16.8 billion, $15.5 billion and $9.8 billion, respectively, a year earlier. Also, reflecting the Corporation's emphasis on building diverse and stable sources of funding to strengthen its operations and sustain future growth, total deposits increased to $11.7 billion from $10.8 billion a year ago. Borrowings rose $1.1 billion, from $4.4 billion in 1996, partially as a result of the repeal of Section 936 of the U.S. Internal Revenue Code, during the third quarter of 1996. Section 936 provided certain U.S. corporations operating on the Island with a tax credit against its federal tax liability on income derived from business operations and investment activity in Puerto Rico. The bill approved repealed the Qualified Possession Source Investment Income (QPSII) credit effective July 1, 1996, for taxable years beginning after December 31, 1995, while the income and the wage credits will be phased out in 10 years. As expected, the repeal of this section caused a reduction in the volume of funds from former 936 corporations from $2.1 billion in 1996 to $1.8 billion in 1997. The Corporation's stockholders' equity reached $1.50 billion at December 31, 1997, compared with $1.26 billion at December 31, 1996. A total of 2,462,272 shares were issued during 1997, in connection with the acquisitions of National Bancorp, Inc. and RCB. On May 8, 1997, the Board of Directors approved a stock repurchase program of up to 3 million shares of the outstanding common stock of the Corporation. As of December 31, 1997, the Corporation had purchased 988,800 shares under this program at a total cost of $39.6 million. The Corporation's regulatory capital ratios continued to exceed the well-capitalized guidelines with a Tier I ratio of 12.17%, a total capital ratio of 14.56% and a leverage ratio of 6.86% at December 31, 1997, compared with 11.63%, 14.18% and 6.71%, respectively, a year earlier. On February 5, 1997, the Corporation sold to institutional investors $150 million of capital securities. BanPonce Trust I, a statutory business trust owned by Popular North America, Inc., issued $150 million of Capital Securities Series A at a rate of 8.327%, fully guaranteed by Popular North America, Inc. and Popular, Inc. The proceeds were upstreamed to Popular North America, Inc. as junior subordinated debt under the same terms and conditions. Cumulative preferred securities having the characteristics of the Series A Capital Securities, as defined by the Federal Reserve, qualify as Tier I capital for bank holding companies. Such Tier I capital treatment provides the Corporation with a cost-effective mean of obtaining capital for regulatory purposes. The Corporation's common stock appreciated 46.7% during 1997, to a market price of $49.50 at December 31, 1997, from $33.75 at the same date in 1996. The total return on the common stock of Popular, Inc., including price appreciation and dividends, was 50.3% for 1997. Further discussion of operating results and the Corporation's financial condition is presented in the following narrative and tables. In addition, Table B provides selected financial data for the last 10 years. EARNINGS ANALYSIS NET INTEREST INCOME The principal source of earnings of the Corporation, represents the excess of the interest earned on earning assets over the interest paid on rate-related liabilities. As further discussed in the Risk Management section, the Corporation constantly monitors the composition and repricing of its assets and liabilities to maintain its net interest income at adequate levels and to avoid undertaking highly sensitive positions that could affect its earnings capacity in a volatile interest rate environment. Net interest income reached $784.0 million for the year ended December 31, 1997, $102.7 million higher than the $681.3 million reported for the same period in 1996. In 1995, net interest income was $584.2 million. To enhance the comparability of assets with different tax attributes, the interest income on tax exempt assets has been adjusted by an amount equal to the net income taxes which would have been paid had the income been fully taxable. This tax-equivalent adjustment is derived using the applicable statutory tax rates and resulted in an amount of $58.9 million in 1997, $48.1 million in 1996 and $44.0 million in 1995. For the year ended December 31, 1997, net interest income, on a taxable equivalent basis, was $842.9 million or 15.6% higher than the $729.4 million reported in 1996. This figure amounted to $628.2 million in 1995. The increase was mostly related to a higher volume in earning assets, partially offset by a higher volume of interest bearing liabilities, accounting for $101.5 million of the increase, while a higher net interest margin on a taxable equivalent basis, was responsible for the remaining $12.0 million. F-7 28 TABLE D Net Interest Income - Taxable Equivalent Basis
Year ended December 31, - ----------------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) 1997 1996 1995 1994 1993 ----------------------------------------------------------------------------------------------------------- AVERAGE Average Average Average Average BALANCE RATE Balance Rate Balance Rate Balance Rate Balance Rate ------------------------------------------------------------------------------------------------------------- Earning assets....... $17,409,634 8.90% $15,306,311 8.63% $13,244,170 8.68% $11,389,680 8.15% $9,894,662 8.33% ============================================================================================================= Financed by: Interest bearing funds ... $14,572,317 4.85% $12,778,488 4.63% $10,991,569 4.75% $ 9,330,837 3.77% $8,097,004 3.46% Non-interest bearing funds ... 2,837,317 2,527,823 2,252,601 2,058,843 1,797,658 ------------------------------------------------------------------------------------------------------------- Total.......... $17,409,634 4.06% $15,306,311 3.86% $13,244,170 3.94% $11,389,680 3.09% $9,894,662 2.83% ============================================================================================================= Net interest income.. $ 842,938 $ 729,438 $ 628,233 $ 576,575 $ 544,471 ============================================================================================================= Spread ............. 4.05% 4.00% 3.93% 4.38% 4.87% Net interest yield... 4.84 4.77 4.74 5.06 5.50
Note: See five-year statistical summary on page F-32 and F-33 for a more detailed information on the components of net interest income. Table D presents a comparative analysis of the net interest income and rates, on a taxable equivalent basis, for the past five years and Table E presents an analysis of the major categories of earning assets and rate-related liabilities and their impact on the net interest income variances due to changes in volumes and rates for the last two years. Average earning assets increased to $17.4 billion compared with $15.3 billion in 1996 and $13.2 billion in 1995. The principal contributor to the increase in average earning assets was the rise of $1.3 billion in average loans followed by an increase of $1.1 billion in investment securities that was partially offset by a lower balance of both money market investments and trading account securities. Average loans reached $10.5 billion, compared with $9.2 billion reported in 1996, a 14.5% increase. Average loans is the largest asset category of the Corporation accounting for 60.6% of its total average earning assets in 1997 and 60.2% in 1996. As Table E shows, the additional loan volume was the main contributor to the rise in interest income of the Corporation in 1997. Aside from the growth in average loans at BPPR and Equity One due to the expansion of their operations, the rise in average loans relates to the acquisitions made during 1997, primarily RCB which contributed $358 million in loans at June 30, 1997, CBC Bancorp, Ltd and National Bancorp, which contributed $194 million and $68 million, respectively, at May 31, 1997. The increase in average loans was mainly attained in commercial and consumer loans, which increased $740 million and $397 million, respectively, primarily due to the business expansion and the aforementioned acquisitions. Average mortgage loans rose $151 million mainly in the United States and the leasing portfolio increased by $49 million. The average yield on loans, on a taxable equivalent basis, for the year ended December 31, 1997, was 10.31% compared with 10.11% in 1996 and 9.98% in 1995. The principal contributor to the rise in the yield on loans was the commercial loan portfolio, which increased by 28 basis points, reaching an average yield of 9.26% compared with 8.98% in 1996. The higher interest rate scenario that prevailed during 1997 compared with 1996, and the fact that some loans that were previously priced using a 936 market rate as a factor, have changed their pricing to a higher rate in accordance with the conventional funds market, were the predominant factors for the improvement in this yield. The yield on consumer loans for 1997 also improved to 13.07%, 22 basis points higher than the 12.85% reported for 1996, mostly due to changes made in the pricing structure of some consumer loan products at BPPR. The yield on mortgage loans, on a taxable equivalent basis, for the year ended December 31, 1997, was 8.54% compared with 8.51% for 1996. Investment securities averaged $5.9 billion in 1997, compared with $4.8 billion in 1996. This rise was principally attained at BPPR mainly in U.S. Treasury and Agency securities. This increase was largely related to arbitrage activities performed during the year which were profitable for the Corporation due to the prevailing interest rates and the tax-favored status of these invest- F-8 29 TABLE E Interest Variance Analysis - Taxable Equivalent Basis
1997 VS. 1996 1996 vs. 1995 - --------------------------------------------------------------------------------------------------------------------------- (In thousands) INCREASE (DECREASE) DUE TO CHANGE IN: Increase (Decrease) Due to Change in: --------------------------------------------------------------------------------- VOLUME RATE TOTAL Volume Rate Total --------------------------------------------------------------------------------- Interest income: Federal funds sold and securities and mortgages purchased under agreements to resell .......... $ (13,917) $ 1,131 $ (12,786) $ 25,661 $ (2,175) $ 23,486 Time deposits with other banks .. 26 (13) 13 122 12 134 Investment securities ........... 75,292 13,448 88,740 26,217 (2,777) 23,440 Trading securities .............. (4,562) 1,328 (3,234) 13,392 (219) 13,173 Loans ........................... 143,007 13,567 156,574 103,667 7,221 110,888 -------------------------------------------------------------------------------- Total interest income ......... 199,846 29,461 229,307 169,059 2,062 171,121 -------------------------------------------------------------------------------- Interest expense: Savings, NOW and money market accounts ..... 14,273 1,547 15,820 7,666 (2,715) 4,951 Other time deposits ............. (4,625) 5,112 487 24,119 (8,632) 15,487 Short-term borrowings ........... 42,987 10,069 53,056 48,288 (5,128) 43,160 Long-term borrowings ............ 45,681 764 46,445 17,189 (10,871) 6,318 -------------------------------------------------------------------------------- Total interest expense ........ 98,316 17,492 115,808 97,262 (27,346) 69,916 -------------------------------------------------------------------------------- Net interest income ............... $ 101,530 $ 11,969 $ 113,499 $ 71,797 $ 29,408 $ 101,205 =================================================================================
Note: The changes that are not due solely to volume or rate are allocated to volume and rate based on the proportion of the change in each category. ments. The interest income derived on U.S. Government Obligations is exempt for income tax purposes in Puerto Rico. The taxable equivalent yield of investment securities improved to 6.90% compared with 6.63% reported in 1996. This rise is mainly related to the higher interest rate scenario that prevailed during the year as compared with 1996. Average money market investments decreased $261 million to $632 million, compared with $893 million in 1996. The decrease relates mainly to a reduction in eligible activities at Popular Securities, due to a lower balance of funds from former 936 corporations. The average yield on these money market investments for 1997 was 5.36%, or 13 basis points higher than the 5.23% reported during 1996, principally affected by the interest rate environment. The decrease in the average balance of trading account securities of $71 million was also caused by the lower balance of these assets at Popular Securities when compared with 1996. The taxable equivalent yield on trading account securities for the years ended December 31, 1997 and 1996 were 6.55% and 6.18%, respectively. As shown in Table E, the increase in the taxable equivalent yield on investment securities, money market and trading account, as well as the increase in the average yield on loans, contributed to the rise in interest income resulting from changes in rates. For the year ended December 31, 1997, the yield on earning assets, on a taxable equivalent basis, was 8.90% versus 8.63% for 1996, an improvement of 27 basis points. On the liability side, the average balance of interest-bearing liabilities reached $14.6 billion in 1997, $1.8 billion higher than the $12.8 billion reported during 1996. Short-term borrowings increased $816 million, medium and long term debt rose $688 million and interest bearing deposits rose $290 million. The increase in the average balance of short-term borrowings was mostly to offset the reduction of $511 million in average 936 deposits at BPPR and to arbitrage opportunities. The average cost of short-term borrowings increased to 5.55% compared with 5.33% reported in 1996, mainly as a result of the market conditions that prevailed in 1997. Average interest-bearing deposits increased $290 million or 3.4%, from $8.4 billion reported in 1996 to $8.7 billion in 1997, while average demand deposits increased $240 million or 11.7% to $2.3 billion. Savings accounts were the main contributor to the rise, increasing $297 million, followed by NOW and money market deposits which rose $133 million. On the other hand, time deposits decreased by $140 million due to the reduction of $511 million in average 936 deposits, offset by rises in individual and F-9 30 corporate deposits of $371 million. The acquisition of banking operations in the mainland during 1997, contributed $264 million in average deposits, while RCB contributed $584 million at acquisition date. Table M has a detail of average deposits by category. The average cost of interest-bearing deposits increased four basis points to 4.21%, compared with 4.17% reported in 1996. The rise is principally attributed to the increase of 20 basis points in the average cost of certificates of deposit that reached 5.45%. Traditionally certificates of deposit from former 936 corporations had a cost below the U.S. market or the Eurodollar market. These deposits had an average cost of 4.88% and comprised 5.8% of the total average interest bearing deposits in 1997, compared with 4.55% and 12.1% in 1996. The reduction in the proportion of deposits from former 936 corporations as well as the increase in their cost were determinant factors for the increase in the average cost of certificates of deposit. The average cost of NOW and money market deposits increased from 3.28% in 1996 to 3.35% in 1997, while the average cost of savings accounts increased five basis points to 3.08% from 3.03% in 1996. Average medium and long-term debt increased $688 million, reaching $1.6 billion and its related cost increased from 6.25% reported in 1996 to 6.47% in 1997. The increase in the average cost is principally due to debt issued in 1997 during a higher interest rate environment and debt with floating interest rates resetting semiannually or quarterly. The average cost of interest-bearing liabilities increased 22 basis points, from 4.63% in 1996 to 4.85% in 1997, while the cost of funding earning assets increased from 3.86% to 4.06% in 1997. Although the yield on earning assets and the cost of interest bearing liabilities increased by 27 and 22 basis points, respectively, the higher proportion of non interest-bearing liabilities, such as demand deposits and other funding sources, to average earning assets allowed the Corporation to improve its net interest margin, on a taxable equivalent basis, by seven basis points to 4.84% for 1997 as compared with 4.77% reported in 1996. PROVISION FOR LOAN LOSSES The provision for loan losses reflects management's assessment of the adequacy of the allowance for loan losses to cover potential losses inherent in the loan portfolio after taking into account the net charge-offs for the current period and loan impairment. The provision for loan losses was $110.6 million for 1997, compared with $88.8 million in 1996, an increase of $21.8 million or 24.5%. The provision for loan losses for 1995 was $64.6 million. The growth in the loan portfolio, and the increase in net charge-offs and non-performing assets experienced by the Corporation were responsible for the increase in the provision. Net charge-offs for the year ended December 31, 1997, were $97.8 million or 0.93% of average loans, compared with $72.1 million or 0.78% in 1996 and $50.0 million or 0.61% in 1995. The increase in net charge-offs was mostly reflected in the consumer and commercial portfolios. The net charge-offs of consumer loans amounted to $50.5 million compared with $29.1 million a year earlier and commercial loans rose $10.8 million in net charge-offs during 1997. Lease financing and construction loans net charge-offs decreased $5.2 million and $1.7 million, respectively, when compared with the year ended December 31, 1996. Mortgage loans net charge-offs amounted to $2.3 million and $1.9 million in 1997 and 1996, respectively. Please refer to the Credit Risk Management and Loan Quality section for a more detailed analysis of the allowance for loan losses, net charge-offs, and credit quality statistics. NON-INTEREST INCOME Non-interest income, which consists primarily of service charges on deposit accounts, credit and debit card fees, other fee-based services and other revenues, rose $39.1 million or 19.3% to $241.4 million in 1997, from $202.3 million in 1996. In 1995, these revenues totaled $166.2 million. The rise in non-interest income was mainly the result of the Corporation's continuing efforts of expanding the range of services offered to customers and building more customer relationships, taking advantage of its technological leadership in the Island and its continued expansion. Accordingly, each year non-interest income has become a more important contributor to the growth in the Corporation's revenues. F-10 31 TABLE F Other Operating Income
Year ended December 31, - ----------------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) Five-Year 1997 1996 1995 1994 1993 C.G.R. - ----------------------------------------------------------------------------------------------------------------------------------- Service charges on deposit accounts..... $ 94,141 $ 85,846 $ 78,607 $ 71,727 $ 68,246 8.34% --------------------------------------------------------------------------------------- Other service fees: Credit card fees and discounts....... 31,371 23,735 20,676 18,620 16,818 13.31 Other fees........................... 17,676 15,859 17,052 15,896 13,135 5.80 Debit card fees...................... 15,957 10,430 5,425 3,185 1,704 60.53 Sale and administration of investment products ............. 9,478 5,384 2,999 1,190 Mortgage servicing fees, net of amortization...................... 9,357 7,534 5,956 2,301 2,936 24.14 Credit life insurance fees........... 7,602 7,955 5,766 4,889 4,270 18.26 Trust fees........................... 7,209 6,174 5,851 5,159 4,084 10.36 --------------------------------------------------------------------------------------- Total other service fees.... 98,650 77,071 63,725 51,240 42,947 18.35 --------------------------------------------------------------------------------------- Other income............................ 48,605 39,353 23,853 17,885 12,569 21.54 Total....................... $241,396 $202,270 $166,185 $140,852 $123,762 14.27% ======================================================================================= Other operating income to average assets.................... 1.31% 1.24% 1.18% 1.15% 1.16% Other operating income to operating expenses................ 37.90 37.32 34.14 31.45 30.02
The growth during 1997 was driven by increases of $21.6 million in other service fees, $9.3 million in other income and $8.3 million in service charges on deposit accounts. As shown in Table F, those increases helped to improve the ratio of non-interest income to average assets from 1.24% in 1996, to 1.31%. In 1995, this ratio was 1.18%. The ratio of non-interest income to operating expenses also increased from 37.32% in 1996 to 37.90% in 1997. Service charges on deposit accounts grew to $94.1 million for the year ended December 31, 1997, from $85.8 million in 1996 and $78.6 million in 1995. This rise mostly resulted from the growth in the activity of commercial accounts, particularly at BPPR, and a higher volume of deposits driven by the acquisition of RCB and the operations acquired in the U.S. during 1997. Measured as a percentage of average deposits, service charges were 0.86% in 1997, compared with 0.82% in 1996 and 1995. Other service fees, which represented 40.9% of non-interest income for the year, increased $21.6 million or 28.0%, from $77.1 million in 1996 to $98.7 million in 1997. The growth in other service fees was the result of higher credit card fees and merchant discounts by $7.6 million and higher debit card fees by $5.5 million. This increase was principally attained at BPPR, where credit card fees and discounts rose $5.6 million, as credit card net sales rose 33.3% and the number of active credit card accounts grew 18.8%. Also, debit card fees which consist primarily of rental income of point-of-sale (POS) terminals and interchange income rose $5.4 million at BPPR. This increase is in line with the growth of 54.8% in the volume of transactions at POS terminals from a monthly average of approximately 2,048,000 in December 1996 to 3,171,000 a year later. The number of POS terminals, from which rental income is derived, increased 43.3% to 16,321 as of December 31, 1997, from 11,392 a year earlier. The expanded sale and administration of investment products such as mutual funds contributed an additional $4.1 million, mainly as a result of the fees earned by the new retail division of Popular Securities which started operations at the end of the second quarter of 1997. Other operating income for the year ended December 31, 1997, increased to $48.6 million from $39.3 million reported in 1996 and $23.9 million reported in 1995. This increase resulted mainly from higher pre-tax gains of $8.4 million on the sale of mortgage loans during 1997 compared with 1996, related to the Corporation's mortgage banking activities. Also in 1997, there was a growth in other income due to the write-off in 1996 of $1.3 million pertaining to the Corporation's investment in preferred stock of Citizens Bank of Jamaica. Moreover, the daily rental operations contributed to the increase in other operating income. Partially offsetting these increases was the recording of a loss of $3.3 million in the market value of a building which was subsequently sold in the last quarter of 1997. F-11 32 TABLE G Operating Expenses
Year ended December 31, - ------------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) Five-Year 1997 1996 1995 1994 1993 C.G.R. ----------------------------------------------------------------------------------- Salaries................................. $211,741 $185,946 $172,504 $160,996 $151,432 9.47% Pension and other benefits............... 69,468 64,609 57,568 45,546 44,713 13.75 Profit sharing........................... 25,684 22,692 19,003 19,205 19,766 8.55 ---------------------------------------------------------------------------------- Total personnel costs.................. 306,893 273,247 249,075 225,747 215,911 10.27 ---------------------------------------------------------------------------------- Equipment expenses....................... 66,446 57,186 47,854 42,229 32,010 20.07 Professional fees........................ 46,767 36,953 28,677 27,002 23,256 18.83 Net occupancy expense.................... 39,617 36,899 32,850 28,440 26,085 9.26 Business promotion ...................... 33,569 26,229 17,801 16,271 16,638 21.75 Communications........................... 33,325 26,470 23,106 20,308 18,203 14.35 Other taxes.............................. 30,283 23,214 20,872 19,807 15,996 15.70 Amortization of intangibles.............. 22,874 18,054 20,204 18,003 16,176 8.97 Printing and supplies.................... 15,539 11,964 11,069 8,817 8,189 16.34 Other operating expenses: Transportation and travel.............. 7,186 5,852 4,424 3,946 3,554 18.04 FDIC assessment........................ 1,499 1,544 10,257 19,346 17,802 (38.01) All other.............................. 32,922 24,307 20,644 17,930 18,456 9.40 --------------------------------------------------------------------------------- Subtotal .......................... 330,027 268,672 237,758 222,099 196,365 13.05 --------------------------------------------------------------------------------- Total ............................. $636,920 $541,919 $486,833 $447,846 $412,276 11.66% ================================================================================== Efficiency ratio......................... 62.12% 61.33% 64.88% 66.21% 66.94% Personnel costs to average assets........ 1.67 1.68 1.76 1.85 2.02 Operating expenses to average assets..... 3.46 3.32 3.45 3.66 3.86 Assets per employee (in millions)........ $ 2.18 $ 2.10 $ 2.01 $ 1.68 $ 1.53
SECURITIES AND TRADING GAINS During 1997, the Corporation sold $5.2 billion in investment securities available-for-sale as part of its asset/liability strategy, realizing a net gain of $2.3 million. In 1996, $2.9 billion of the investment securities available-for-sale were sold for a net gain of $3.1 million, reflecting gains of $7.0 million on the sale of equity securities partially offset by a loss of $3.9 million on the sale of other securities. Trading account activities for the year ended December 31, 1997, resulted in profits of $3.9 million compared with profits of $108 thousand in 1996. In 1997, the Corporation benefitted from favorable market conditions, particularly related to mortgage-backed securities at Popular Home Mortgage. OPERATING EXPENSES Operating expenses for 1997 increased $95.0 million or 17.5%, reaching $636.9 million compared with $541.9 million in 1996 and $486.8 million in 1995. As a percentage of average assets, operating expenses increased to 3.46% in 1997 from 3.32% in 1996 and 3.45% in 1995. The operations acquired in the mainland during the year accounted for approximately $23.0 million of the increase. Also, the acquisition of RCB on June 30, 1997, which was merged into BPPR, accounted for approximately $16 million in additional expenses during 1997. Table G presents a detail of operating expenses and various related ratios for the last five years. The Corporation's largest category of operating expenses, personnel costs, totaled $306.9 million in 1997, an increase of 12.3% compared with $273.2 million in 1996. The growth in personnel costs was led by an increase of $25.8 million in salary expense, resulting from an increase in headcount, primarily caused by the Corporation's business expansion and acquisitions, and annual merit increases. Full-time equivalent employees (FTE) amounted to 8,854 at December 31, 1997, from 7,996 at the end of 1996. The acquisitions completed in the U.S. added 363.5 FTE, while RCB added 375.5 FTE at the acquisition dates. The ratio of F-12 33 assets per employee rose to $2.18 million in 1997 from $2.10 million in 1996, while personnel costs as a percentage of average assets decreased slightly to 1.67% from 1.68% in 1996. Total personnel costs for 1995 amounted to $249.1 million. Employee benefits, including profit sharing expense, rose $7.9 million to $95.2 million in 1997, compared with $87.3 million in 1996. The rise in pension costs and other fringe benefits was primarily related to increases in medical plan costs and higher payroll tax expenses resulting from the increase in salaries. Furthermore, profit sharing expense rose $3.0 million, as a result of higher eligible salaries and stronger profitability ratios at BPPR. Other operating expenses, excluding personnel costs, totaled $330.0 million for the year ended December 31, 1997, compared with $268.7 million in 1996 and $237.8 million in 1995. Professional fees increased 26.6% from $37.0 million in 1996 to $46.8 million in 1997. The increase in this category reflected the Corporation's continued growth and expansion, and higher expenditures related with consulting and technical support. Business promotion grew $7.3 million or 28.0% due to the impact of the business expansion, the growth in business activity, and the development and promotion of new products and services. Also during 1997, the Corporation launched an institutional campaign in the continental U.S. to emphasize Banco Popular's presence and image as a Hispanic bank, and performed significant promotional efforts related to the new credit card program in U.S. Other taxes also reflected an increase of $7.1 million mainly due to higher levels of taxable property, higher municipal license taxes in Puerto Rico, and an increase in the tax rate for personal property in the municipality of San Juan, Puerto Rico, where the Corporation's headquarters are located. Equipment and communications expenses grew a combined $16.1 million or 19.3% in 1997. This increase mostly resulted from the expansion of the electronic payment system and network of POS terminals. By the end of 1997, the Corporation had increased its automated teller machine (ATM) network by 90 machines, when compared with prior year in order to expand the electronic delivery capabilities. Other operating expenses, which include transportation and travel expenses, insurance expenses, interchange and processing fees related with credit and debit cards, and FDIC assessment among others, increased $9.9 million mostly as a result of the Corporation's growth and expansion and the increased volume of credit and debit card transactions. Moreover, as a result of the acquisitions made after the third quarter of 1996, the amortization of intangibles rose $4.8 million during 1997, when compared with 1996. IMPACT OF THE YEAR 2000 ISSUE The Year 2000 Issue is the result of computer programs being written using two digits rather than four to define the applicable year. All computer programs that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations on normal business activities. Based on its assessment, the Corporation determined that it will be required to modify or replace significant portions of its software so that its computer systems will properly utilize dates beyond December 31, 1999. The Corporation's management believes that with some modifications to existing software and conversions to new software, the Year 2000 Issue will be mitigated. However, if such modifications and conversions are not made, or are not completed on a timely manner, the Year 2000 Issue could have a material impact on the operations of the Corporation. The Corporation has established a company-wide task force and developed an action plan addressing the Year 2000 Issue, that is currently being implemented. Under this action plan, the Corporation has initiated formal communications with all of its major suppliers and customers to determine the extent to which the Corporation is vulnerable to those third parties failure to remediate their own Year 2000 Issue. The Corporation's total Year 2000 project costs and estimates to complete are based on presently available information. The Corporation will utilize both internal and external resources to reprogram, or replace, and test the software for Year 2000 modifications. The total remaining incremental costs of the Year 2000 project is estimated at $11.9 million and will be funded through operating cash flows. The costs of the project are based on management's best estimates, which were derived utilizing numerous assumptions of future events including the continued availability of certain resources. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those planned. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes and similar uncertainties. F-13 34 INCOME TAX EXPENSE Income tax expense for the year ended December 31,1997, was $74.5 million compared with $70.9 million in 1996 and $59.8 million in 1995. The increase in 1997 is primarily due to higher pre-tax earnings by $28.0 million partially offset by higher benefits of net tax exempt interest income and certain tax credits available to the Corporation in its Puerto Rico operations. The effective tax rate was 26.2% in 1997, 27.7% in 1996 and 29.0% in 1995. The decrease in the effective tax rate was principally due to an increase in the exempt interest income, principally from U.S. Treasury and agency securities as previously explained in the net interest income section. The difference between the effective tax rates and the maximum tax rate for the Corporation, which is 39%, is primarily due to the interest income earned on certain investments and loans which is exempt from income tax, net of the disallowance of related expenses attributable to the exempt income. The Corporation uses an asset and liability approach in accounting for income taxes, as required by SFAS 109. The objective of the SFAS 109 is to recognize the amount of taxes payable or refundable in the current year and to recognize deferred tax liabilities or assets for the future tax consequences of events that have been recognized in the financial statements or tax returns. The measurement of deferred tax liabilities or assets is based on regular tax rates and provisions of the tax laws. At December 31, 1997, the Corporation's net deferred tax assets amounted to $83 million, compared with $64 million at December 31, 1996. Gross deferred tax assets rose from $90 million to $118 million mainly as a result of the recognition of a deferred tax asset of $32 million related with the repeal of the reserve method of accounting for losses on loans. Other components of gross deferred tax assets are net operating losses, tax credits, postretirement benefit obligations and other temporary differences principally arising from the deferral of loan origination costs and commissions. When necessary, a valuation allowance is recorded for those deferred tax assets for which the Corporation cannot determine the likelihood of their realizability. At December 31, 1997, the valuation allowance amounted to $0.2 million compared with $0.6 million at December 31, 1996. Gross deferred tax liabilities were $35 million at December 31, 1997, compared with $26 million at December 31, 1996. The major components of deferred tax liabilities are differences between assigned values and tax bases of assets and liabilities recognized in purchase business combinations and other temporary differences primarily related with unrealized gains on investment securities available-for-sale. On October 31, 1994, the Governor of Puerto Rico signed into law the Puerto Rico Tax Reform Act of 1994. The Act made comprehensive important changes in several major areas of the law. In general, the provisions of the Act were effective for taxable years beginning after June 30, 1995. Accordingly, most changes of the Reform were effective for the Corporation in 1996. Among the most significant changes that affect the Corporation are: the reduction in the higher marginal rate from 42% to 39%, the repeal of the reserve method for determining losses on loans and the recapture into income for tax purposes of the allowance for loan losses balance at December 31, 1995 over a period of four years, the 100% dividend received deduction on dividends received from controlled domestic corporations and the repeal of the 29% withholding tax on interest paid to non-residents and unaffiliated parties. Please refer to Note 23 of the Consolidated Financial Statements for additional information on income taxes. STATEMENT OF CONDITION ANALYSIS At December 31, 1997, the Corporation's total assets reached $19.3 billion, reflecting an increase of $2.5 billion or 15.1% when compared with $16.8 billion at December 31, 1996. The growth in total assets was partially related to the acquisition of RCB on June 30, 1997, with $791 million in total assets at that date. Also, the operations acquired in Florida, Illinois and Texas during 1997 contributed to the growth of the Corporation with $602 million in total assets at acquisition date. Total assets at the end of 1995 amounted to $15.7 billion. Average total assets for 1997 amounted to $18.4 billion compared with $16.3 billion in 1996 and $14.1 billion in 1995. EARNING ASSETS Earning assets at December 31, 1997, totaled $18.1 billion, compared with $15.5 billion at December 31, 1996 and $14.7 billion at December 31, 1995. Money market investments, investment and trading securities amounted to $6.7 billion at December 31, 1997, representing an increase of $1.0 billion when compared with $5.7 billion at December 31, 1996. The increase was mainly reflected in investment F-14 35 TABLE H Loans Ending Balances
As of December 31, - ----------------------------------------------------------------------------------------------------------------------------------- (In thousands) Five-Year 1997 1996 1995 1994 1993 C.G.R. -------------------------------------------------------------------------------------------- Commercial, industrial and agricultural........................ $ 4,637,409 $3,822,096 $3,205,031 $2,893,534 $2,369,514 16.82% Construction.......................... 250,111 200,083 215,835 161,265 153,436 7.72 Lease financing....................... 581,927 516,001 498,750 448,236 375,693 12.92 Mortgage*............................. 2,833,896 2,576,887 2,403,631 2,177,763 1,576,044 29.08 Consumer.............................. 3,073,264 2,663,961 2,354,237 2,100,531 1,872,235 10.80 -------------------------------------------------------------------------------------------- Total .............................. $11,376,607 $9,779,028 $8,677,484 $7,781,329 $6,346,922 16.72% ============================================================================================
*Includes loans held-for-sale. securities, which totaled $5.6 billion at the end of 1997, compared with $4.6 billion in 1996. The rise in investment securities was mainly due to arbitrage opportunities undertaken by BPPR during 1997. Investment securities available-for-sale grew $1.8 billion, from $3.4 billion in 1996 to $5.2 billion in 1997. Partially offsetting this increase, was a reduction of $0.8 billion in the investment securities held-to-maturity. Money market investments reached $814 million at December 31, 1997, compared with $800 million at the same date in 1996. Trading account securities totaled $222 million at December 31, 1997, compared with $292 million at December 31, 1996. As shown in Table H, total loans at December 31, 1997, amounted to $11.4 billion, an increase of $1.6 billion or 16.3% over the $9.8 billion reported at the end of 1996. At the same date in 1995 total loans were $8.7 billion. The commercial loan portfolio had the largest growth, rising $815 million or 51.0% of the total increase in loans, followed by consumer loans which increased $409 million or 25.6% and mortgage loans with $257 million or 16.1% of the total increase. The lease financing portfolio increased $66 million while the construction loan portfolio increased $50 million. Commercial loans reached $4.6 billion at December 31, 1997, compared with $3.8 billion at the same date last year. The increase in the commercial loan portfolio was principally attained at BPPR and Banco Popular, Illinois, which increased $658 million and $179 million, respectively. The growth experienced at BPPR was mostly the result of the continued marketing efforts geared at the retail and middle market, primarily through the origination of "Flexicuenta de Negocios", an innovative product for commercial customers with integrated deposit, investment and credit facilities. Also, the growth was achieved through increases in government guaranteed loans, primarily SBA loans, the development of a sales culture and the acquisitions of RCB in Puerto Rico, and the acquisitions performed in Illinois, Florida and Texas. At their acquisition dates, these banking operations contributed $187 million to the commercial loan portfolio. Commercial loans at December 31, 1995 totaled $3.2 billion. The Corporation's management expects that the growth in the commercial loan portfolio will continue during 1998 primarily in the service industries, small and middle market, and construction and land developers, based on the introduction of government promoted privately developed housing projects and infrastructure development projects in Puerto Rico. During 1997, consumer loans grew to $3.1 billion compared with $2.7 billion at the end of 1996. Consumer loans, which include personal, auto and boat, credit cards and reserve lines grew $409 million principally at BPPR, Equity One, Banco Popular, Illinois and Popular Finance by $265 million, $46 million, $39 million and $37 million, respectively. At BPPR, RCB contributed $137 million as of the acquisition date, while the operations acquired in the mainland contributed $50 million in consumer loans. At December 31, 1995, consumer loans totaled $2.4 billion. Of the total portfolio of consumer loans, 46.2% are secured loans of which 22.3% are secured by mortgages and 3.4% have cash collateral. The personal loan portfolio amounted to $1.8 billion at December 31, 1997, compared with $1.5 billion reported at December 31, 1996, or 57.9% of the total consumer loan portfolio as of both dates, an increase of $237 million or 15.4%. Most of the growth was attained at BPPR, where personal loans rose $154 million to $1.4 billion at December 31, 1997. Auto loans, which represented 19.5% of the consumer loan portfolio as of December 31, 1997, rose $72 million to $601 million in 1997. The increase in this category was mostly achieved through business expansion and marketing efforts. The credit card portfolio rose $78 million to $552 million at December 31, 1997, principally at BPPR, whose portfolio increased $73 million F-15 36 or 93% of the total increase, due to strong marketing efforts in new products. Also, the acquisition of RCB contributed $19 million to this increase. The Corporation had $2.8 billion in mortgage loans as of December 31, 1997, compared with $2.6 billion at the same date in 1996 and $2.4 billion in 1995. This increase was achieved in spite of the sale of $655 million of mortgage loans during 1997, mostly through the expansion in the United States and a higher loan origination volume in Puerto Rico. The lease financing portfolio amounted to $582 million as of December 31, 1997, compared with $516 million and $499 million as of December 31, 1996 and 1995, respectively. Construction loans amounted to $250 million as of December 31, 1997, from $200 million a year earlier and $216 million as of the same date in 1995. DEPOSITS AND OTHER INTEREST-BEARING LIABILITIES Total deposits at December 31, 1997, increased $986 million or 9.2% reaching $11.7 billion compared with $10.8 billion at December 31, 1996. The increase was related to the acquisitions performed during 1997, contributing $1.1 billion in total deposits at their respective acquisition dates. The increase was achieved notwithstanding the decrease of $367 million in 936 deposits. The geographic distribution of the Corporation's total deposits at the end of 1997, included 76.9% in Puerto Rico and the Virgin Islands, and the remaining 23.1% in the U.S. mainland. Total deposits as of December 31, 1995, amounted to $9.9 billion. Core deposits totaled $9.7 billion by the end of 1997, compared with $8.6 billion at the same date last year. The growth resulted principally from rises of $363 million in certificates of deposit under $100,000, $384 million in savings accounts, $216 million in demand deposits, and $184 million in NOW and money market accounts. At their respective acquisition dates, the acquired operations contributed approximately $918 million to the increase in core deposits. Borrowings, excluding subordinated notes increased $1.1 billion, from $4.3 billion at the end of 1996 to $5.4 billion at December 31, 1997. The rise was mainly due to increases in federal funds purchased and securities sold under agreements to repurchase of $848 million and $417 million in notes payable. The increase in borrowed funds was used primarily to finance the Corporation's loan growth and arbitrage activities. On May 23, 1997, a shelf registration was filed with the Securities and Exchange Commission, allowing the Corporation to issue medium-term notes, unsecured debt securities and preferred stock in an aggregate amount of up to $1 billion. These securities are guaranteed by the Corporation. As of December 31, 1997, the Corporation had issued $230 million in medium-term notes under that shelf registration. Guaranteed Preferred Beneficial Interest in Subordinated Debentures ("Capital Securities") were issued during the first quarter of 1997. The Corporation issued $150 million of those securities at 8.327% through BanPonce Trust I, a statutory business trust owned by Popular North America (formerly BanPonce Financial Corp.). The proceeds were upstreamed to Popular North America as junior subordinated debt under the same terms and conditions. The Captial Securities qualify as Tier I capital for regulatory purposes. STOCKHOLDERS' EQUITY At December 31, 1997, stockholders' equity amounted to $1.50 billion, an increase of $241 million or 19.0% compared with the balance of $1.26 billion at the end of 1996. This increase was mainly due to earnings retention, the issuance of 2,462,272 common shares for the acquisitions of RCB and National Bancorp, and the shares issued through the Corporation's Dividend Reinvestment and Purchase Plan. The shares issued for acquisitions resulted in $96 million of additional capital. As approved in the Corporation's stockholders meeting on April 25, 1997, the authorized common stock of the Corporation was increased from 90,000,000 shares to 180,000,000 shares. On May 8, 1997, the Board of Directors approved a stock repurchase program of up to 3 million shares of the outstanding common stock of the Corporation. As of December 31, 1997, the Corporation had purchased 988,800 shares under this program with a total cost of $39.6 million. The unrealized holding gains on securities available-for-sale, net of deferred taxes, amounted to $33.3 million at December 31, 1997, compared with $1.7 million a year ago. The Corporation had 4,000,000 shares of preferred stock outstanding at December 31, 1997. These shares are non-convertible and are redeemable at the option of the Corporation on or after June 30, 1998. Dividends are non-cumulative and are payable monthly at an annual rate per share of 8.35% based on the liquidation preference value of $25 per share. Regulatory guidelines require a minimum Tier I capital of 4%, total capital to risk-weighted assets ratio of 8% and a leverage ratio of 3%. Banks and bank holding companies which meet or exceed a Tier I ratio of 6%, a total capital ratio of 10% and a F-16 37 TABLE I Capital Adequacy Data
As of December 31, - -------------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) 1997 1996 1995 1994 1993 ---------------------------------------------------------------------------------- Risk-based capital: Tier I capital .......................... $ 1,335,391 $ 1,121,128 $ 1,003,072 $ 953,266 $ 786,686 Supplementary (Tier II) capital ......... 263,115 246,350 231,091 104,338 106,193 ---------------------------------------------------------------------------------- Total capital ....................... $ 1,598,506 $ 1,367,478 $ 1,234,163 $ 1,057,604 $ 892,879 ================================================================================== Risk-weighted assets: Balance sheet items ..................... $ 10,687,847 $ 9,368,420 $ 8,175,420 $ 7,219,906 $ 6,150,749 Off-balance sheet items ................. 287,822 275,397 249,529 199,327 250,102 ---------------------------------------------------------------------------------- Total risk-weighted assets .......... $ 10,975,669 $ 9,643,817 $ 8,424,949 $ 7,419,233 $ 6,400,851 ================================================================================== Ratios: Tier I capital (minimum required-4.00%) . 12.17% 11.63% 11.91% 12.85% 12.29% Total capital (minimum required-8.00%) .. 14.56 14.18 14.65 14.25 13.95 Leverage ratio (minimum required-3.00%) . 6.86 6.71 6.66 7.62 6.95 Equity to assets ........................ 7.44 7.33 7.58 7.57 7.42 Tangible equity to assets ............... 6.52 6.55 6.60 6.55 6.29 Equity to loans ......................... 13.00 12.97 13.03 13.01 13.91 Internal capital generation rate ........ 10.76 10.99 9.36 9.48 10.08 - --------------------------------------------------------------------------------------------------------------------------------
leverage ratio of 5% are considered well-capitalized by regulatory standards. At December 31, 1997, the Corporation exceeds those regulatory risk-based capital requirements for well-capitalized institutions by wide margins, due to the high level of capital and the conservative nature of the Corporation's assets. Tier I capital to risk-adjusted assets and total capital ratios at December 31, 1997, were 12.17% and 14.56%, respectively, compared with 11.63% and 14.18% at the same date in 1996. The Corporation's leverage ratio was 6.86% at December 31, 1997, compared with 6.71% as of the same date the previous year. Table I shows capital adequacy information for the current and previous four years. Intangible assets rose $101 million from $131 million at December 31, 1996. The rise in intangible assets was the result of the acquisitions during 1997, of which RCB accounted for $64 million at acquisition date, while the operations acquired in the U.S. resulted in $40 million in intangible assets. At December 31, 1997, total intangibles consisted of $120 million in goodwill, $75 million in core deposit intangibles, $29 million in mortgage servicing rights and $8 million in other intangibles. At the end of 1996, core deposit intangibles were $55 million, goodwill totaled $46 million, mortgage servicing rights were $26 million and other intangibles were $4 million. The average tangible equity increased to $1.19 billion for the year ended December 31, 1997, from $1.06 billion a year before, an increase of $128 million or 12.1%. Total tangible equity at December 31, 1997, was $1.27 billion compared with $1.13 billion at December 31, 1996. The tangible equity to assets ratio for 1997 was 6.52% compared with 6.55% in 1996. Book value per common share amounted to $20.73 at December 31, 1997, compared with $17.59 at year-end 1996. The market value of the Corporation's common stock at the end of 1997, was $49.50 compared with $33.75 a year earlier. The total market capitalization was $3.4 billion, compared with $2.2 billion as of December 31, 1996. The Corporation's stock is traded on the National Association of Securities Dealers Automated Quotation (NASDAQ) National Market System under the symbol BPOP. Table J shows the range of market quotations and cash dividends declared for each quarter during the last five years. The preferred stock of the Corporation is also traded on the NASDAQ National Market System under the symbol BPOPP. Its market value at December 31, 1997 and 1996 was $26.00 and $26.25 per share, respectively. The Corporation has a Dividend Reinvestment Plan for its stockholders. This plan offers the stockholders the opportunity to automatically reinvest their dividends in shares of common stock at a 5% discount from the average market price at the time of issuance. During 1997, 120,726 shares, equivalent to $4.6 million in additional capital, were issued under the plan. A total of 1,663,189 shares have been issued under this plan since its inception in 1989, contributing $24.5 million in additional capital. Dividends declared on common stock during 1997 totaled $54 million, compared with $46 million in 1996. The Corporation increased its quarterly dividend from $0.18 to $0.22 per common share, a 22.2% increase, effective with the dividend paid on F-17 38 TABLE J Common Stock Performance
Cash Book Market Price Dividends Value Dividend Price/ Market/ --------------- Declared Per Payout Dividend Earnings Book High Low Per Share Share Ratio Yield * Ratio Ratio 1997 $20.73 25.19% 1.76% 16.50x 238.78% 1ST QUARTER .... $36 3/4 $33 1/16 $ 0.18 2ND QUARTER .... 42 7/8 33 3/4 0.18 3RD QUARTER .... 55 7/8 41 1/8 0.22 4TH QUARTER .... 54 3/8 45 3/4 0.22 1996 17.59 24.63 2.65 12.59 191.87 1st quarter .... $23 1/8 $19 3/8 $ 0.15 2nd quarter .... 23 6/7 21 7/8 0.18 3rd quarter .... 27 3/4 22 5/8 0.18 4th quarter .... 35 25 7/8 0.18 1995 15.81 26.21 3.15 9.24 122.55 1st quarter .... $15 7/8 $14 1/16 $0.13 2nd quarter .... 17 3/4 15 5/8 0.15 3rd quarter .... 19 1/2 17 3/4 0.15 4th quarter .... 19 15/16 19 1/16 0.15 1994 13.74 27.20 3.18 7.66 102.37 1st quarter .... $16 1/4 $15 3/8 $0.12 2nd quarter .... 16 3/8 15 1/2 0.12 3rd quarter .... 16 5/8 15 3/4 0.13 4th quarter .... 16 1/2 13 1/2 0.13 1993 12.75 25.39 2.97 9.42 123.58 1st quarter .... $15 5/8 $13 1/4 $0.10 2nd quarter .... 14 1/8 12 3/16 0.10 3rd quarter .... 15 1/8 13 1/4 0.12 4th quarter .... 16 1/8 14 7/8 0.13
*Based on the average high and low market price for the four quarters. Note: All per share data has been adjusted to reflect the stock split effected in the form of a dividend of one share for each share outstanding on July 1, 1996. October 1, 1997. Total dividends declared per common share for 1997 were $0.80 compared with $0.69 in 1996 and $0.58 in 1995. The dividend payout ratio to common stockholders for the year was 25.19% compared with 24.63% in 1996. Dividends declared on the preferred stock amounted to $8.35 million in 1997 and 1996. Popular International Bank, Inc. and Popular North America, Inc.'s bank subsidiaries (Banco Popular, Illinois, Banco Popular, N.A. (California), Banco Popular, N.A. (Florida), Banco Popular, N.A. (Texas) and Banco Popular, FSB) have certain statutory provisions and regulatory requirements and policies, such as the maintenance of adequate capital, that limit the amount of dividends they can pay. Other than these limitations, no other restrictions exist on the ability of Popular International Bank, Inc. and Popular North America, Inc. to make dividend and asset distributions to the Corporation, nor on the ability of the subsidiaries of Popular North America, Inc., except for Banco Popular, FSB, to make distributions to Popular North America, Inc. In connection with the acquisition by Banco Popular, FSB from the Resolution Trust Company (RTC) of four New Jersey branches of the former Carteret Federal Savings Bank, the RTC provided to Banco Popular, FSB interim financial assistance in the form of a loan in the amount of $20 million, which matures on January 20, 2000, but which is prepayable anytime before then. Pursuant to the terms of such financing, Banco Popular, FSB may not, among other things, declare or pay any dividends on its outstanding capital stock (unless such dividends are used exclusively for payment of principal of or interest on such RTC loan) or make any distribution of its assets until payment in full of such promissory note. As of December 31, 1997, the undistributed earnings of Banco Popular, FSB totaled $49 million. RISK MANAGEMENT Popular, Inc. has specific policies and procedures which structure and delineate the management of risks, particularly those related with interest rate exposure, liquidity and credit, all of which are broadly defined below. F-18 39 MARKET RISK Market risk is the risk of economic loss arising from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates, commodity prices, and other relevant market or price changes. The Corporation's primary market risk exposure is that to interest rates as the net interest income is affected primarily by interest rate volatility and its impact on the repricing of assets and liabilities. Interest rate risk refers to the probability of a reduction in earnings due to fluctuations in interest rates. Other factors which can influence the Corporation's net interest income are the spread between different market rates or basis risk, timing differences between the maturity and repricing of assets and liabilities and the sensitivity of their rates to market interest rates. It is a priority for the Corporation's management to monitor continuously the degree of interest rate risk assumed and ensure that it remains within an acceptable range. During fiscal 1997, net interest income accounted for 76% of the Corporation's gross revenues. A major responsibility of the Corporation's Board of Directors and management is to ensure that interest rate volatility does not affect adversely net interest income, and hence, profitability. The Board of Directors is responsible for ensuring that interest rate risk is managed prudently and it delegates this responsibility on the Asset/Liability Management Committee (ALCO). The Board approves interest rate risk policies and oversees its implementation by the ALCO. The objective of the ALCO is to ensure that the Corporation's net interest income remains stable despite the potential volatility of interest rates. TRADING SECURITIES Another source of market risk for the Corporation is the risk associated with its trading activities. Financial instruments, including, to a limited extent, derivatives such as interest rate futures and options contracts, are utilized by the Corporation in connection with its trading activities and are carried at market value. In conjunction with mortgage banking activities, the Corporation records the securitization of mortgage loans held-for-sale as a sale of mortgage loans and the purchase of a mortgage-backed security classified as a trading security. Realized and unrealized changes in market values are recorded separately in the trading profit or loss account in the period in which the changes occur. Interest revenue and expense arising from trading instruments are included in the income statement as part of net interest income rather than in the trading profit or loss account. Securities sold but not yet purchased, which represent the Corporation's obligation to deliver securities sold which were not owned at the time of sale ("short sales"), are recorded at market value. At December 31, 1997, the Corporation trading portfolio represented 1.2% of total assets or $222 million as compared with 1.7% or $292 million at December 31, 1996, and was composed of the following:
Weighted Amount Average Yield ------------------------------ (In thousands) Mortgage-backed securities ..... $150,094 6.14% Commercial paper ............... 26,588 5.70 US Treasury and agencies ....... 32,858 5.43 Puerto Rico Government obligations 10,613 5.20 Other .......................... 2,150 6.78 ------------------------------ $222,303 5.94% ==============================
The Corporation's trading portfolio as of December 31, 1997, was comprised primarily of securities issued by Puerto Rico entities or collateralized by real estate assets located in Puerto Rico. These usually have certain tax benefits, if purchased by residents of Puerto Rico. The prices of these securities tend to be less sensitive to changes in interest rates than similar securities issued by U.S. mainland entities, because of tax treatment for Puerto Rico investors. Recent changes to local tax laws in Puerto Rico have decreased the supply of some types of tax-advantaged investments, thereby reducing the sensitivity of a portion of the Corporation's securities portfolio to changes in interest rates. F-19 40 TABLE K Interest Rate Sensitivity
As of December 31, 1997 - ------------------------------------------------------------------------------------------------------------------------- By Repricing Dates ------------------------------------------------------------------------------- After After Within three months six months 0-30 31-90 but within but within After one (Dollars in thousands) days days six months one year year - ------------------------------------------------------------------------------------------------------------------------- Assets: Federal funds sold and securities purchased under agreements to resell ................ $ 485,184 $ 310,595 $ 7,024 Short-term interest bearing deposits in other banks ............. 11,187 100 Investment and trading securities ..... 1,088,640 172,295 433,769 $ 245,689 $ 3,929,908 Loans ................................. 3,400,811 556,864 503,157 1,008,750 5,907,025 Other assets .......................... ---------------------------------------------------------------------------- Total ............................. 4,985,822 1,039,854 943,950 1,254,439 9,836,933 ---------------------------------------------------------------------------- Liabilities and stockholders' equity: Savings, NOW and money market accounts ............................ 703,405 66,828 4,172,249 Other time deposits ................... 1,161,381 846,091 803,395 501,099 948,302 Federal funds purchased and securities sold under agreements to repurchase . 2,172,914 271,915 87,500 10,000 181,000 Other short-term borrowings ........... 486,968 330,922 195,536 233,866 40,143 Notes payable ......................... 234,439 280,318 23,000 40,500 825,439 Subordinated notes and capital securities ......................... 275,000 Non-interest bearing deposits ......... Other non-interest bearing liabilities Stockholders' equity .................. ---------------------------------------------------------------------------- Total ............................. 4,759,107 1,796,074 1,109,431 785,465 6,442,133 ---------------------------------------------------------------------------- Off-balance sheet financial instruments 40,000 160,000 (25,000) (175,000) Interest rate sensitive gap ........... 266,715 (596,220) (165,481) 443,974 3,219,800 Cumulative interest rate sensitive gap ....................... 266,715 (329,505) (494,986) (51,012) 3,168,788 Cumulative sensitive gap to earning assets ...................... 1.48% (1.82%) (2.74%) (0.28%) 17.54% - ------------------------------------------------------------------------------------------------------------------------- Non-interest bearing (Dollars in thousands) funds Total - ---------------------------------------------------------------------- Assets: Federal funds sold and securities purchased under agreements to resell ................ $ 802,803 Short-term interest bearing deposits in other banks ............. 11,287 Investment and trading securities ..... 5,870,301 Loans ................................. 11,376,607 Other assets .......................... $1,239,509 1,239,509 ------------------------- Total ............................. 1,239,509 19,300,507 ------------------------- Liabilities and stockholders' equity: Savings, NOW and money market accounts ............................ 4,942,482 Other time deposits ................... 4,260,268 Federal funds purchased and securities sold under agreements to repurchase . 2,723,329 Other short-term borrowings ........... 1,287,435 Notes payable ......................... 1,403,696 Subordinated notes and capital securities ......................... 275,000 Non-interest bearing deposits ......... 2,546,836 2,546,836 Other non-interest bearing liabilities 358,369 358,369 Stockholders' equity .................. 1,503,092 1,503,092 -------------------------- Total ............................. 4,408,297 19,300,507 -------------------------- Off-balance sheet financial instruments Interest rate sensitive gap ........... Cumulative interest rate sensitive gap ....................... Cumulative sensitive gap to earning assets ...................... - ---------------------------------------------------------------------
INTEREST RATE RISK Various techniques are employed to assess the degree of interest rate risk in the Corporation. These include static gap analysis, simulations and duration analysis. Each focuses on different aspects of the interest rate risk that is assumed at any point in time, and are therefore used jointly to make informed judgements about the risk levels and the appropriateness of strategies under consideration. Gap analysis measures the volume of assets and liabilities at a point in time and their repricing during future time periods. The volume of assets repricing is adjusted to take into consideration the expected prepayment of certain assets such as mortgage loans and mortgage-backed securities, which can be prepaid before their contractual maturity. Deposits repricing in future periods are adjusted to take into consideration the sensitivity of non-time deposits to market rates. Since these typically reprice with a lag to movements in short-term market rates and by a lower magnitude, deposits repricing within one year include an amount of non-time deposits consistent with the historical relationship of their rates against market interest rates as measured using statistical techniques. The net balance of assets or liabilities repricing during future time periods particularly within one year is an indicator of the degree of short-term interest rate risk being assumed by the Corporation. It is subject to policy limits approved by the Board. Table K presents the Corporation's interest rate sensitivity as of December 31, 1997. F-20 41 In addition to the Corporation's static gap position, other factors which affect the future level of net interest income include, the relationship between different market rates as well as their levels, the interest rates of assets and liabilities due for repricing, and the volume and duration of new assets and liabilities booked in future periods. Simulation analysis, as further explained below, measures the impact of these factors on future net interest income, and serves as another measure of the short-term interest rate risk assumed by the Corporation. Various interest rate scenarios are utilized in simulation analysis to assess the stability of net interest income in both rising and declining rate scenarios. Whereas static gap and simulation analysis are useful for measuring the degree of short-term market risk assumed, duration analysis focuses on the level of longer-term market risk assumed. Duration measures the sensitivity of the market prices of assets and liabilities to changes in interest rates. It focuses on economic value, as opposed to gap and simulation analysis which consider primarily the impact on net interest income. Since duration considers the impact of rate changes on all the cash flows of assets and liabilities, it is considered a more comprehensive measure of risk than gap or simulation analysis. Duration addresses another weakness of other risk measurement methods by stating all future cash flows of assets and liabilities in terms of their present value. Sensitivity analysis (from here on sensitivity), is performed at the corporate level to, among other financial analysis described above, express the potential loss in future earnings resulting from selected hypothetical changes in interest rates. Sensitivity includes both trading instruments and other than trading instruments. Derivative financial instruments, specifically interest rate swaps, are also included in the sensitivity to achieve more comprehensive risk management. Sensitivity is calculated on a monthly basis using a simulation model which incorporates both actual balance sheet figures detailed by maturity and interest yields or costs, the expected balance sheet dynamics, reinvestments, and other non-interest related data. Simulations are run using various interest rate scenarios to determine potential changes to the future earnings of the Corporation. These forward looking figures of the Corporation reflect no significant changes between a most likely to occur interest rate scenario as compared with both rising and declining interest rate scenarios. The increase in net interest income on a hypothetical rising rate scenario for the next twelve months is $7.7 million and the decrease for the same period utilizing a hypothetical declining rate scenario is $5.7 million. Computations of the prospective effects of hypothetical interest rate changes are based on many assumptions, including relative levels of market interest rates, loan prepayments and deposits decay. They should not be relied upon as indicative of actual results. Further, the computations do not contemplate actions the management could take to respond to changes in interest rates. By their nature, these forward looking choices are only estimates and may be different from what actually occurs in the future. Rising and declining interest rate scenarios are estimated monthly, and are important inputs into the simulation model. These are calculated to represent the highest increase and decrease which various market rates should reflect during the following twelve months, with a 95% confidence level. This means that on average, in nineteen months out of every twenty, actual rate movements will not exceed the rising or declining rate scenario. The underlying assumption is that the movement of interest rates approaches a normal distribution and that its properties can be used to project maximum future changes in rates with a certain confidence level. The Corporation "backtests" rising and declining rate scenarios continuously to validate the confidence levels. As of December 1997, the simulation's rising and declining rate scenarios provided for a change of 75 basis points in the federal funds and prime rates within a 12-month period. Changes for the U.S. Treasury yield curve under rising and declining scenarios, were estimated at an average of aproximately 140 basis points. All changes for market rates estimated in the rising and declining rate scenarios exceeded 10% of their actual level as of the end of 1997, within a one-year timeframe. The maximum changes assumed for the prime rate (which is an administered rate) were 75 basis points, or 8.8% of the 8.50% level at which it ended 1997. During 1997, the general level of interest rates increased during the first four months while it decreased during the remainder of the year. During the first quarter, the financial markets were expecting a more restrictive monetary policy from the Federal Open Market Committee (FOMC) due to exceptionally strong economic growth and increasing levels of resource utilization rates. In March, the FOMC increased the federal funds rate 25 basis points, leaving it unchanged for the remainder of the year. In early 1997, the Corporation positioned its balance sheet to benefit from an increase in the general level of interest rates, but as the year progressed and interest rates started to decline, it extended the duration of the investment portfolio to address more F-21 42 effectively the risk posed by declining interest rates. The Corporation's net interest margin for the year, on a taxable equivalent basis, was 4.84% which represents an increase of seven basis points over that of the previous year. As of December 31, 1997, the Corporation had a total of $1.3 billion in mortgage-backed securities including collateralized mortgage obligations (CMO). CMOs amounted to $864 million or 66% of the mortgage-backed securities portfolio at that date. The portfolio had an estimated average life of 9.2 years and an estimated average yield to maturity of 6.41%. The average life and yield to maturity of the mortgage-backed securities portfolio is partially affected by the level of prepayments of the underlying mortgage loans. The portfolio includes securities which represent an interest in pools of mortgage loans as well as obligations (CMOs) collateralized by such securities. In most cases, the debtor of the underlying loans has the option of repaying the principal balance owed at any time. A decrease in the general level of interest rates usually results in a higher level of prepayments of mortgage loans, while an increase would tend to reduce the level of prepayments. The yield to maturity of mortgage-backed securities may also be affected by a change in prepayment rates. Mortgage-backed security portfolios with an aggregate unamortized premium may have a decrease in their yield to maturity in an environment of increasing prepayment speeds, whereas the yield to maturity may increase in an environment of decreasing prepayment speeds. The opposite is true in the case of portfolios with aggregate discounts. The mortgage-backed securities portfolio of the Corporation had an aggregate premium of $3.9 million, as of December 31, 1997. Derivatives are used, to a limited extent, by the Corporation with the primary objective of controlling exposures to market risk. The primary instruments used include exchange-traded futures contracts and interest rate swaps. Financial futures are used primarily for hedging the cost of future debt issuances as well as protecting the value of assets from market risk. Interest rate swaps are used primarily to synthetically increase the duration of borrowings. The notional amount of outstanding interest rate swaps as of December 31, 1997 was $230 million, which represents an increase of $90 million compared to the end of the previous year. The following table indicates the types of derivative financial instruments the Corporation held at December 31, 1997.
----------------------------------------- Weighted Notional average Fair amount rate (%) value ----------------------------------------- (Dollars in thousands) Interest rate swaps: Pay floating/receive fixed ..... $ 15,000 5.94 / 6.42 $ 108 Pay fixed/receive floating ...... 215,000 6.24 / 5.88 (1,678) Interest rate swaptions ......... 32,271 5.86 23,277 Interest rate options............ 60,917 533 Interest rate caps............... 3,413 41 Interest rate floors............. 3,413 (46) Foreign exchange contracts ...... 1,234
LIQUIDITY RISK The objective of the Corporation's liquidity management is to ensure the ability to raise financing for its current operations and future growth. Liquidity is a function of the ability to raise funds through borrowings in the financial markets, as well as obtain funding through the use of the Corporation's assets. Other objectives pursued in the Corporation's liquidity management are the diversification of funding sources and the control of interest rate risk. Management tries to diversify the sources of financing used by the Corporation in order to avoid undue reliance on any particular source. Since the duration and repricing characteristics of the Corporation's borrowings determine to a major extent the overall interest rate risk of the Corporation, they are also actively managed. The Corporation's assets and liabilities represent substantial sources of liquidity. Among the Corporation's assets, the investment securities and loan portfolios can be used to raise financing, while among the liabilities, various mechanisms are used to borrow funds. These include gathering retail and corporate deposits in the markets in which the Corporation competes, repurchase agreements, unsecured short-term borrowings in the U.S. money markets, commercial paper, medium term notes, bank notes and others. Notes 9 through 16 to the financial statements present details of the Corporations's deposits and borrowings by type, as of December 31, 1997 and 1996. F-22 43 TABLE L Maturity Distribution of Earning Assets
As of December 31, 1997 - ----------------------------------------------------------------------------------------------------------------------------------- Maturities ------------------------------------------------------------------------------------------ After one year through five years After five years -------------------------------------------------------- Fixed Variable Fixed Variable One year interest interest interest interest (In thousands) or less rates rates rates rates Total - ----------------------------------------------------------------------------------------------------------------------------------- Money market securities................ $ 760,160 $ 45,200 $ 22 $ 8,708 $ 814,090 Investment and trading securities........................... 1,266,772 $3,465,706 458,832 525,564 43,460 5,760,334 Loans: Commercial........................... 2,116,970 864,377 647,453 421,179 587,430 4,637,409 Construction......................... 184,937 39,845 4,755 13,245 7,329 250,111 Lease financing...................... 163,114 412,001 6,812 581,927 Consumer............................. 1,026,818 1,856,070 7,170 183,102 104 3,073,264 Mortgage......................... 628,176 748,463 20 1,457,183 54 2,833,896 ---------------------------------------------------------------------------------------- Total............................ $6,146,947 $7,386,462 $1,163,430 $2,607,107 $ 647,085 $17,951,031 ========================================================================================
Note: Federal Reserve Bank stock, Federal Home Loan Bank stock, and other equity securities held by the Corporation are not included in this table. - ------------------------------------------------------------------------------- The investment securities portfolio is a major source of liquidity within the Corporation's assets. It consists primarily of U.S. Treasury and Agency obligations. As of December 31, 1997, the entire portfolio totaled $5.6 billion with an average life of 3.9 years. The net unrealized gain of the portfolio at that time amounted to $45.3 million. U.S. Treasury and Agency securities amounted to $4.1 billion or 73% of the total portfolio, with an average life of 2.2 years. Securities classified available-for-sale totaled $5.2 billion or 93% of the total portfolio, and the net unrealized gain amounted to $44.5 million. As shown in Table L, $1.3 billion or 22% of the investment securities portfolio had a maturity of one year or less at the end of 1997. The Corporation's loan portfolio is another liquidity source since it generates substantial cash flow as a result of principal and interest payments and principal prepayments. In particular, mortgage loans and some types of consumer loans have active secondary markets and can be sold or pledged for borrowings. Also, some loans can be securitized or sold outright in the secondary markets. Table L presents a maturity distribution of the loan portfolio as of December 31, 1997. As of that date $4.1 billion or 36% of the loan portfolio matured within one year. Despite the increasing importance of wholesale borrowings at the Corporation, deposits are the single most important funding source. They tend to be less volatile than institutional borrowings and their cost is less sensitive to changes in market rates. Deposits include retail and commercial demand deposit accounts as well as time deposits and savings accounts. The Corporation has obtained substantial shares of the deposits in its principal markets, due to the extensive branch network and leadership in electronic banking. As of December 31, 1997, the Corporation's core deposits amounted to $9.7 billion or 83% of total deposits, an increase of $1.2 billion or 13.7% from the previous year. As presented in Table M, during fiscal 1997 average total deposits increased $530 million over the previous year, while average core deposits rose $579 million. The volume of the Corporation's core deposits located in continental U.S. markets increased to $2.6 billion as of December 31, 1997 from $1.9 billion as of the end of the previous year. Certificates of deposit with denominations of $100,000 and over as of December 31, 1997, totaled $2.0 billion, or 17.1% of total deposits. Their distribution by maturity was as follows:
(In thousands) 3 months or less........... $1,271,197 3 to 6 months.............. 307,860 6 to 12 months............. 147,748 over 12 months............. 286,475 ---------- $2,013,280 ==========
F-23 44 TABLE M Average Total Deposits
For the Year - ----------------------------------------------------------------------------------------------------------------------- Five-Year (In thousands) 1997 1996 1995 1994 1993 C.G.R. ------------------------------------------------------------------------------ Private demand........................ $ 1,972,052 $ 1,726,596 $1,571,405 $1,515,158 $1,396,339 9.28% Public demand......................... 317,248 321,249 268,317 273,565 235,323 9.53 Other non-interest bearing accounts... 4,367 5,910 5,983 6,967 3,678 2.78 ------------------------------------------------------------------------------ Non-interest bearing............ 2,293,667 2,053,755 1,845,705 1,795,690 1,635,340 9.30 ------------------------------------------------------------------------------ Savings accounts...................... 3,393,279 3,095,898 2,913,380 2,839,300 2,492,845 10.67 NOW and money market accounts......... 1,281,298 1,148,727 1,102,593 1,133,106 1,078,075 6.04 ------------------------------------------------------------------------------ Savings deposits................ 4,674,577 4,244,625 4,015,973 3,972,406 3,570,920 9.28 ------------------------------------------------------------------------------ Certificates of deposit: Under $100,000...................... 1,216,583 1,307,323 1,281,873 1,160,063 1,143,624 0.76 $100,000 and over................... 1,865,720 1,371,928 1,034,195 590,305 498,093 29.53 936 ................................ 508,789 1,020,064 999,384 1,007,147 1,029,450 (15.81) ------------------------------------------------------------------------------ Certificates of deposit......... 3,591,092 3,699,315 3,315,452 2,757,515 2,671,167 4.47 ------------------------------------------------------------------------------ Public time........................... 215,243 238,377 175,706 177,534 124,629 6.69 Other time............................ 216,978 225,724 229,315 134,081 122,829 10.78 ------------------------------------------------------------------------------ Other time deposits............. 432,221 464,101 405,021 311,615 247,458 8.63 ------------------------------------------------------------------------------ Interest bearing................ 8,697,890 8,408,041 7,736,446 7,041,536 6,489,545 7.11 ------------------------------------------------------------------------------ Total $10,991,557 $10,461,796 $9,582,151 $8,837,226 $8,124,885 7.54% ==============================================================================
Borrowings from institutional sources are an increasingly important source of financing for the Corporation. The Corporation's short-term borrowings include federal funds purchased, repurchase agreements and commercial paper. Federal funds purchased and repurchase agreements usually have maturities within 90 days, while commercial paper sold matures within 270 days. As of December 31, 1997, the outstanding balance of federal funds purchased, repurchase agreements and commercial paper sold amounted to $2.7 billion, an increase of $848 million as compared to the previous year. Long-term borrowings diversify the Corporation's funding sources and are a useful tool for adjusting the average duration of the Corporation's liabilities. These include primarily bank notes and medium term notes, which are sold to investors both directly and through a selling group of dealers. As of December 31, 1997, outstanding medium term notes and bank notes amounted to $1.4 billion, an increase of $417 million over the previous year. For information on the maturities of medium and long-term debt issued, please refer to notes 12 through 16 to the Consolidated Financial Statements. The Corporation's deposits and borrowings include funds from former 936 corporations. The outstanding balance of deposits and borrowings from former 936 corporations as of December 31, 1997, amounted to $1.8 billion, a decrease of $358 million as compared with the previous year. Total deposits and borrowings from former 936 corporations as of December 31, 1997, amounted to 9.9% of total liabilities, a decrease as compared with the previous year when these funds amounted to 13.7% of liabilities. Section 936 of the Internal Revenue Code was eliminated in 1996, in the legislation which increased the federal minimum wage. This legislation repealed the exemption from federal taxation of interest income earned from investments in financial assets issued in Puerto Rico, effective for fiscal years commencing after December 31, 1995. Since most investments by former 936 companies in financial assets issued in Puerto Rico are now subject to federal taxation, these have decreased in volume, particularly short-term investments. The exposure of the Corporation to short-term funds from former 936 corporations has decreased substantially since the repeal of Section 936. As of December 31, 1997, these funds maturing in less than one year amounted to $960 million which represents a decrease of 29% as compared with the previous year when the amount of these funds was $1.3 billion. F-24 45 CREDIT RISK MANAGEMENT AND LOAN QUALITY One of the Corporation's primary risk exposure is its credit risk, which represents the possibility of loss from a borrower's failure to perform according to the terms of a transaction. The Corporation controls and monitors this risk with policies, procedures and various levels of managerial involvement. The strategies utilized to manage credit risk begin with the adherence to policies and procedures established for the initial underwriting of the credit portfolio, followed by the ongoing monitoring of the portfolio, including the early identification of potential problems and their resolution. Also, the Corporation continues emphasizing the skills and experience of the credit staff and improving the processing technology. Furthermore, the Corporation has an independent Credit Review and Audit Division, which performs ongoing independent reviews of specific loans for credit quality, proper documentation and risk management purposes. This division is centralized and independent of the lending function. It also manages the credit rating system and tests the adequacy of the allowance for loan losses in accordance with generally accepted accounting principles (GAAP) and regulatory standards. Credit extensions are approved by credit officers of the respective lending departments. The number and level of officers approval depend on the dollar amount and risk characteristics of the credit facility. The Corporation receives collateral to support credit extensions and commitments, whenever it is considered necessary. The amount of collateral obtained is based on the credit assessment of the customer, and may include real or personal property, accounts receivable, inventory and cash on deposit. The Corporation's credit risk at December 31, 1997, was concentrated in its $11.4 billion loan portfolio, which represented 63% of earning assets. The loan portfolio is well-balanced as the Corporation's credit policies and procedures emphasize diversification among geographical areas, business and industry groups, to minimize the adverse impact of any single event or set of occurrences. The credit risk exposure is spread among individual consumers, small commercial loans and a diverse base of borrowers engaged in a wide variety of businesses. The Corporation has over 843,000 consumer loans and over 52,000 commercial lending relationships. Only 40 of these relationships have loans outstanding over $10 million. Highly leveraged transactions and credit facilities to finance speculative real estate ventures are minimal and there are no LDC loans. The following risk concentration categories existed at year-end. Geographic Risk - The asset composition of the Corporation by geographical area at December 31, 1997 and 1996 is presented in the following table:
1997 1996 (Dollars in thousands) ----------------------------------------------------------- Puerto Rico $14,189,332 73.5% $12,386,136 73.9% United States 4,616,196 23.9 3,756,526 22.4 U.S. and British Virgin Islands and Latin America 494,979 2.6 621,441 3.7 ----------------------------------------------------------- $19,300,507 100.0% $16,764,103 100.0% ===========================================================
At December 31, 1997, BPPR, the Corporation's largest subsidiary, operated 201 branches in Puerto Rico, 29 in New York, seven in the U.S. Virgin Islands and one in the British Virgin Islands. Puerto Rico's economic outlook is generally similar to that of the mainland, and the Government of the Island and its instrumentalities are all investment-grade rated borrowers in the United States capital markets. As previously discussed in the Liquidity Risk section of this financial review, in August 1996, the U.S. Congress approved legislation that repealed Section 936 of the Internal Revenue Code. The bill approved repealed the Qualified Possession Source Investment Income (QPSII) credit retroactively for taxable years beginning after December 31, 1995, while the income and wage credits are being phased-out in 10 years. No significant changes have been experienced on the general economic conditions of Puerto Rico as a result of the enactment of this law. Meanwhile, the Corporation continues diversifying its geographical risk. In 1997, the Corporation acquired Seminole National Bank, located in Florida. This banking operation operated three branches, with $19 million in loans and $23 million in deposits at acquisition date. Also in 1997, the Corporation acquired National Bancorp Inc. and CBC Bancorp, located in Illinois. These acquisitions added $261 million in loans and $408 million in deposits. In Puerto Rico, the Corporation completed the acquisition of RCB. This acquisition added $361 million in F-25 46 loans and $584 million in deposits. At the end of 1997, the Corporation expanded the operation to Texas with the acquisition of Houston BanCorporation, which added $39 million in loans and $41 million in deposits. Equity One, the Corporation's mortgage and consumer finance operation in the mainland, had 117 branches in 30 states and $1.2 billion in total assets at December 31, 1997, compared with 102 branches in 28 states and $1.1 billion in total assets at December 31, 1996. The following table presents the net income for 1997 and total assets as of December 31, 1997, by subsidiary:
% of % of Consolidated Consolidated (Dollars in thousands) Net Income Net Income Total Assets Assets - -------------------------------------------------------------------------------------------------------------------------- Banco Popular de Puerto Rico $178,725 85.28% $15,179,575 78.65% Equity One, Inc. 16,592 7.92 1,222,443 6.33 Popular Leasing 8,534 4.07 598,895 3.10 Banco Popular, Illinois 4,378 2.09 979,132 5.07 Popular Securities 2,325 1.11 651,565 3.38 Popular Finance 4,437 2.12 152,514 0.79 Banco Popular, FSB 933 0.45 338,896 1.76 Popular Home Mortgage 1,951 0.93 144,782 0.75 Banco Popular, N.A. (California) 664 0.32 141,734 0.73 Banco Popular, N.A. (Florida) (8,861) (4.23) 67,717 0.35 Parent Company, other subsidiaries and eliminations (113) (0.06) (176,746) (0.91) ---------------------------------------------------------------- Total $209,565 100.00% $19,300,507 100.00% ================================================================
Consumer Credit Risk - Consumer credit risk arises from exposures to credit card receivables, home mortgages, personal loans and other installment credit facilities. At December 31, 1997, consumer and residential mortgage loans amounted to $3.1 billion and $2.8 billion, respectively, with $964 million in unused credits card lines. At December 31, 1997, the secured consumer loan portfolio was $1.4 billion or 46.2% of the total consumer portfolio. Industry Risk - Total commercial loans, including commercial real estate and construction loans, amounted to $4.9 billion at year-end. The Corporation's strategy to emphasize the use of collateral has resulted in a secured commercial and construction loan portfolio comprised of approximately $1.4 billion, or 28.2% of the total commercial and construction loan portfolios. These loans are secured by real estate, consisting primarily of residential, owner-occupied and income producing properties. Furthermore, commercial and construction loans secured by cash collateral totaled $206 million, or 4.2% of the commercial and construction portfolio at the end of 1997. Also, at December 31, 1997, the Corporation had $1.7 billion in unused commitments under lines of credit to commercial, industrial and agricultural concerns. Commercial and standby letters of credit totaled $73 million at December 31, 1997. There are no significant concentrations in any one industry with a substantial portion of the customers having credit needs of less than $100,000. Government Risk - As of December 31, 1997, $4.1 billion of the investment securities represented exposure to the U.S. Government in the form of U.S. Treasury securities and obligations of U.S. Government agencies and corporations. In addition, $90 million of residential mortgages and $375 million in commercial loans were insured or guaranteed by the U.S. Government or its agencies. The Corporation is one of the largest SBA lenders in the United States. Furthermore, there was $114 million of investment securities representing obligations of the Puerto Rico Government and political subdivisions thereof, $63 million of loans issued to or guaranteed by these same entities and $32 million of loans issued to or guaranteed by the U.S. Virgin Islands' Government. NON-PERFORMING ASSETS Non-performing assets consist of past due loans on which no interest income is being accrued, renegotiated loans and other real estate. As shown in Table N, as of December 31, 1997, non-performing assets amounted to $212 million or 1.87% of loans, compared with $155 million or 1.58% of total loans and $155 million or 1.79% of total loans at the end of 1996 and 1995, respectively. Non-performing loans at December 31, 1997, totaled $194 million or 1.71% of loans as compared with $145 million or 1.49% a year earlier. As of December 31, 1995, non-performing loans were $144 million or 1.67% of loans. F-26 47 TABLE N Non-Performing Assets
As of December 31, - ------------------------------------------------------------------------------------------------------------------------------ (Dollars in thousands) 1997 1996 1995 1994 1993 ------------------------------------------------------------------------------- Commercial, industrial and agricultural........................ $105,880 $ 81,534 $ 87,250 $ 53,553 $ 49,517 Construction.......................... 2,704 2,000 4,733 7,994 8,215 Lease financing....................... 1,569 1,599 5,606 4,027 4,429 Mortgage.............................. 53,449 43,955 32,066 16,510 14,363 Consumer.............................. 30,840 16,320 14,827 12,179 16,290 Renegotiated accruing loans........... 6 3,308 2,742 2,982 5,643 Other real estate..................... 18,012 6,076 7,807 10,390 12,699 ------------------------------------------------------------------------------- Total .......................... $212,460 $154,792 $155,031 $107,635 $111,156 =============================================================================== Accruing loans past-due 90 days or more..................... $ 20,843 $ 12,270 $ 11,660 $ 15,012 $ 15,505 =============================================================================== Non-performing assets to loans........ 1.87% 1.58% 1.79% 1.38% 1.75% Non-performing loans to loans......... 1.71 1.49 1.67 1.21 1.46 Non-performing assets to assets....... 1.10 0.92 0.99 0.84 0.97 Interest lost......................... $ 11,868 $ 7,696 $ 7,135 $ 5,441 $ 4,992
Note: The Corporation's policy is to place commercial and construction loans on non-accrual status if payments of principal or interest are past-due 60 days or more. Lease financing receivables and conventional residential mortgage loans are placed on non-accrual status if payments are delinquent 90 days or more. Close-end consumer loans are placed on non-accrual when they become 90 days or more past-due and are charged-off when they are 120 days past-due. Open-end consumer loans are not placed on non-accrual status and are charged-off when they are 180 days past-due. Loans past-due 90 days or more and still accruing are not considered as non-performing loans. The increase in non-performing assets was reflected in non-performing commercial loans, consumer loans, other real estate owned and mortgage loans which rose $24 million, $15 million, $12 million and $9 million, respectively. The rise in the commercial non-performing portfolio was principally a result of the classification as non-accrual of an $11 million commercial income-producing real estate loan in the U.S. Virgin Islands and an increase of $13 million in the U.S. banking operations of the Corporation partially related to the acquisitions, with particular emphasis on the implementation of the Corporation's more conservative non-accrual policy, as further explained below. Also, the higher loan volume was a leading factor for the increase. The aforementioned commercial loan in the U.S. Virgin Islands was subsequently collected during the first quarter of 1998. The non-performing consumer loans increased principally as a result of the higher level of personal bankruptcies which caused an increase in delinquency levels. In the non-performing mortgage loan category, Equity One reached $25 million at December 31, 1997, an increase of $7 million when compared with $18 million at the same date last year. Most of this increase relates to its continued loan growth coupled with an increased level of personal bankruptcies in the mainland. Bankruptcy filings in the U.S. during the 12-month period ended on September 30, 1997, increased 23% over the same period a year before. The other real estate category increased $6 million at Equity One and $5 million at BPPR, mostly as a result of successful collection efforts through the legal process of several real estate secured loans. The Corporation reports its non-performing assets on a more conservative basis than most U.S. banks. The Corporation's policy is to place commercial loans on non-accrual status if payments of principal or interest are delinquent 60 days rather than the standard industry practice of 90 days. Financing leases, conventional mortgages and close-end consumer loans are placed on non-accrual status if payments are delinquent 90 days. Closed-end consumer loans are charged-off when payments are delinquent 120 days. Open end (revolving credit) consumer loans are charged-off if payments are delinquent 180 days. Certain loans which would be treated as non-accrual loans pursuant to the foregoing policy, are treated as accruing loans if they are considered well-secured and in the process of collection. Under the standard industry practice, close-end consumer loans are charged-off when delinquent 120 days, but are not customarily placed on non-accrual status prior to being charged-off. Assuming the standard industry practice of placing commercial loans on non-accrual status when payments of principal and interest are past due 90 days or more and excluding the closed-end consumer loans from non-accruing, the Corporation's non-performing assets at December 31, 1997, would have been $167 million or 1.47% of loans, and the allowance for loan losses would have been 126.9% of non-performing assets. At December 31, 1996 and 1995, adjusted non-performing assets would have F-27 48 TABLE O Allowance for Loan Losses and Selected Loan Losses Statistics
(Dollars in thousands) 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------ Balance at beginning of year............. $ 185,574 $ 168,393 $ 153,798 $ 133,437 $ 110,714 Allowances purchased..................... 13,237 402 3,473 1,580 Provision for loan losses................ 110,607 88,839 64,558 53,788 72,892 ---------------------------------------------------------------------------------- 309,418 257,634 218,356 190,698 185,186 ---------------------------------------------------------------------------------- Losses charged to the allowance: Commercial............................. 55,734 38,017 34,383 27,435 29,501 Construction........................... 600 2,369 2,046 1,794 3,060 Lease financing........................ 23,085 22,129 6,979 6,860 9,150 Mortgage............................... 2,612 2,189 1,618 1,310 477 Consumer............................... 65,559 43,257 33,681 29,545 35,239 ---------------------------------------------------------------------------------- 147,590 107,961 78,707 66,944 77,427 ---------------------------------------------------------------------------------- Recoveries: Commercial............................. 18,385 11,498 9,404 6,950 6,279 Construction........................... 122 207 288 1,374 607 Lease financing........................ 15,890 9,749 2,342 3,514 2,081 Mortgage............................... 356 295 243 5 36 Consumer............................... 15,070 14,152 16,467 18,201 16,675 ---------------------------------------------------------------------------------- 49,823 35,901 28,744 30,044 25,678 ---------------------------------------------------------------------------------- Net loans charged-off.................... 97,767 72,060 49,963 36,900 51,749 ---------------------------------------------------------------------------------- Balance at end of year................... $ 211,651 $ 185,574 $ 168,393 $ 153,798 $ 133,437 ================================================================================== Loans: Outstanding at year end................ $11,376,607 $9,779,028 $8,677,484 $7,781,329 $6,346,922 Average................................ 10,548,207 9,210,964 8,217,834 7,107,746 5,700,069 Ratios: Allowance for loan losses to year end loans............................ 1.86% 1.90% 1.94% 1.98% 2.10% Recoveries to charge-offs.............. 33.76 33.25 36.52 44.88 33.16 Net charge-offs to average loans......... 0.93 0.78 0.61 0.52 0.91 Net charge-offs earnings coverage...... 4.04X 4.79x 5.42x 6.21x 3.96x Allowance for loan losses to net charge-offs.......................... 2.16 2.58 3.37 4.17 2.58 Provision for loan losses to: Net charge-offs.................... 1.13 1.23 1.29 1.46 1.41 Average loans...................... 1.05% 0.96% 0.79% 0.76% 1.28% Allowance to non-performing assets..... 99.62 119.89 108.62 142.89 120.04 - ------------------------------------------------------------------------------------------------------------------------------
been $117 million or 1.19% of loans and $121 million or 1.39% of loans, respectively. The allowance for loan losses as a percentage of non-performing assets as of December 31, 1996 and 1995, would have been 159.0% and 139.6%, respectively. Accruing loans that are contractually past-due 90 days or more as to principal or interest, but are well-secured and in the process of collection as of December 31, 1997, amounted to $21 million as compared with $12 million in 1996 and 1995. Once a loan is placed in non-accrual status the interest previously accrued and uncollected is charged against current earnings and thereafter, income is recorded only to the extent of any interest collected. The interest income that would have been realized had these loans been performing in accordance with their original terms amounted to $11.9 million for 1997, compared with $7.7 million for 1996 and $7.1 million in 1995. F-28 49 ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is maintained at a level sufficient to provide for estimated loan losses based on evaluations of known and inherent risks in the loan portfolio. The Corporation's management evaluates the adequacy of the allowance for loan losses on a monthly basis. In determining the allowance, management considers the portfolio risk characteristics, prior loss experience, prevailing and projected economic conditions and loan impairment measurement. A loan is considered impaired when, based on the current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. At December 31, 1997 and 1996, the portion of the allowance for loan losses related to impaired loans was $19 million and $18 million, respectively. Please refer to Notes 1 and 6 to the Consolidated Financial Statements for further information related to impaired loans. At December 31, 1997, the allowance for loan losses was $212 million or 1.86% of loans, compared with $186 million or 1.90% at the same date in 1996. At December 31, 1995, the allowance was $168 million or 1.94% of loans. Based on current and expected economic conditions, the expected level of net loan losses and the methodology established to evaluate the adequacy of the allowance for loan losses, management considers that the Corporation continues enjoying an adequate position in its allowance for loan losses. Broken down by major loan categories, the allowance for the last five years was as follows:
ALLOWANCE FOR LOAN LOSSES AT DECEMBER 31, (IN MILLIONS) 1997 1996 1995 1994 1993 ----------------------------------------------------------------- Commercial $101.5 $ 91.8 $ 82.6 $ 73.8 $ 64.0 Construction 10.6 10.5 11.0 10.8 10.6 Lease financing 5.9 3.4 6.4 6.5 5.8 Consumer 82.8 69.6 60.6 56.7 52.0 Mortgage 10.9 10.3 7.8 6.0 1.0 ----------------------------------------------------------------- $211.7 $185.6 $168.4 $153.8 $133.4 =================================================================
Table O summarizes the movement in the allowance for loan losses and presents selected loan loss statistics for the past five years. As this table demonstrates, net loan losses for the year totaled $97.8 million or 0.93% of average loans, an increase of $25.7 million or 36.6% from $72.1 million or 0.78% of average loans in 1996. The rise primarily reflected higher net charge-offs in the consumer and commercial loan portfolios, partially offset by a reduction in net losses in the lease financing portfolio. Consumer loans net charge-offs totaled $50.5 million or 1.76% of average consumer loans for 1997, compared with $29.1 million, or 1.18% of average consumer loans for 1996. Within this category, personal loans reflected an increase of $14.3 million, from $15.6 million or 1.10% of average personal loans in 1996 to $29.9 million or 1.79% in 1997. This increase is the result of the growth of $254 million in the average personal loan portfolio together with the record breaking levels in personal bankruptcies during 1997. In addition, credit cards net losses amounted to $15.7 million or 3.08% of the average credit card portfolio as compared with $11.0 million or 2.49% in 1996. Commercial loans net charge-offs amounted to $37.3 million in 1997, compared with $26.5 million a year earlier. As a percentage of average commercial loans, this figure increased to 0.85% in 1997 from 0.77% in 1996. The increase in commercial loans net losses was influenced by the implementation of the Corporation's more conservative charge-off policy at the acquired banks and the portfolio growth. Net charge-offs in the mortgage portfolio totaled $2.3 million in 1997 compared with $1.9 million in 1996. Lease financings net charge-offs decreased $5.2 million, from $12.4 million or 2.45% of average lease financings in 1996 to $7.2 million or 1.30% in 1997, as a result of a more conservative charge-off policy implemented in 1996 by the Corporation's leasing subsidiary in Puerto Rico, which resulted in a subsequent increase in the level of recoveries in 1997 by $6.1 million, while charge-offs stabilized. However, the level of recoveries in the leasing portfolio should stabilize during 1998. F-29 50 STATISTICAL SUMMARY 1993-1997 POPULAR, INC. STATEMENTS OF CONDITION
As of December 31, (In thousands) 1997 1996 1995 1994 1993 --------------------------------------------------------------------- ASSETS Cash and due from banks.................................. $ 463,151 $ 492,368 $ 458,173 $ 442,316 $ 368,837 --------------------------------------------------------------------- Money market investments: Federal funds sold and securities and mortgages purchased under agreements to resell................. 802,803 778,597 796,417 265,000 247,333 Time deposits with other banks........................ 9,013 19,023 100 100 15,100 Bankers' acceptances.................................. 2,274 2,656 2,202 570 259 --------------------------------------------------------------------- 814,090 800,276 798,719 265,670 262,692 --------------------------------------------------------------------- Trading securities....................................... 222,303 292,150 330,674 1,670 3,017 --------------------------------------------------------------------- Investment securities available-for-sale, at market value and at lower of cost or market value before 1994.............................. 5,239,005 3,415,934 3,209,974 839,226 715,565 --------------------------------------------------------------------- Investment securities held-to-maturity, at cost 408,993 1,197,066 1,651,344 2,955,911 3,329,798 --------------------------------------------------------------------- Loans held-for-sale...................................... 265,204 255,129 112,806 10,296 --------------------------------------------------------------------- Loans.................................................... 11,457,675 9,854,911 8,883,963 8,066,954 6,655,072 Less-Unearned income............................. 346,272 331,012 319,285 295,921 308,150 Allowance for loan losses................... 211,651 185,574 168,393 153,798 133,437 --------------------------------------------------------------------- 10,899,752 9,338,325 8,396,285 7,617,235 6,213,485 --------------------------------------------------------------------- Premises and equipment................................... 364,892 356,697 325,203 324,160 298,089 Other real estate........................................ 18,012 6,076 7,807 10,390 12,699 Customers' liabilities on acceptances.................... 1,801 3,100 2,208 902 1,392 Accrued income receivable................................ 118,677 95,487 113,539 78,765 79,285 Other assets............................................. 252,040 380,247 125,742 103,088 95,763 Intangible assets........................................ 232,587 131,248 142,977 128,729 132,746 --------------------------------------------------------------------- $19,300,507 $16,764,103 $15,675,451 $12,778,358 $11,513,368 ===================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits: Non-interest bearing ................................ $ 2,546,836 $ 2,330,704 $ 2,021,658 $ 1,949,244 $ 1,848,859 Interest bearing .................................... 9,202,750 8,432,571 7,855,004 7,063,191 6,673,799 --------------------------------------------------------------------- 11,749,586 10,763,275 9,876,662 9,012,435 8,522,658 Federal funds purchased and securities sold under agreements to repurchase.................. 2,723,329 1,875,465 3,000,878 1,438,038 951,733 Other short-term borrowings........................... 1,287,435 1,404,006 454,707 573,841 664,173 Notes payable......................................... 1,403,696 986,713 730,428 459,524 253,855 Senior debentures..................................... 30,000 30,000 30,000 30,000 Acceptances outstanding............................... 1,801 3,100 2,208 902 1,392 Other liabilities..................................... 356,568 314,012 263,871 211,195 182,362 17,522,415 15,376,571 14,358,754 11,725,935 10,606,173 --------------------------------------------------------------------- Subordinated notes................................... 125,000 125,000 175,000 50,000 62,000 --------------------------------------------------------------------- Preferred stock of Banco Popular..................... 11,000 --------------------------------------------------------------------- Preferred beneficial interest in Popular North America's junior subordinated deferrable interest debentures guaranteed by the Corporation........................................ 150,000 --------------------------------------------------------------------- Stockholders' equity: Preferred stock....................................... 100,000 100,000 100,000 100,000 Common stock.......................................... 412,029 396,531 197,692 197,029 196,395 Surplus............................................... 602,023 496,582 427,282 409,445 386,622 Retained earnings..................................... 395,253 267,719 350,480 272,458 208,607 Treasury stock - at cost.............................. (39,559) Unrealized gains (losses) on investment............... securities available-for-sale, net of deferred taxes.. 33,346 1,700 16,243 (19,366) Capital reserves...................................... 50,000 42,857 42,571 --------------------------------------------------------------------- 1,503,092 1,262,532 1,141,697 1,002,423 834,195 --------------------------------------------------------------------- $19,300,507 $16,764,103 $15,675,451 $12,778,358 $11,513,368 =====================================================================
F-30 51 STATISTICAL SUMMARY 1993-1997 POPULAR, INC. STATEMENTS OF INCOME
For the year ended December 31, - ------------------------------------------------------------------------------------------------------------------------------- (In thousands, except per common share information) 1997 1996 1995 1994 1993 -------------------------------------------------------------------------- INTEREST INCOME: Loans.......................................... $1,080,408 $ 924,076 $ 813,137 $667,047 $549,388 Money market investments....................... 33,923 46,697 23,077 5,186 6,434 Investment securities.......................... 358,736 280,610 259,941 214,611 215,944 Trading account securities..................... 18,236 21,470 9,652 297 370 -------------------------------------------------------------------------- Total interest income....................... 1,491,303 1,272,853 1,105,807 887,141 772,136 Less - Interest expense........................ 707,348 591,540 521,624 351,633 280,008 -------------------------------------------------------------------------- Net interest income......................... 783,955 681,313 584,183 535,508 492,128 Provision for loan losses...................... 110,607 88,839 64,558 53,788 72,892 -------------------------------------------------------------------------- Net interest income after provision for loan losses........................... 673,348 592,474 519,625 481,720 419,236 Gain on sale of investment securities.......... 2,268 3,094 5,368 224 864 Trading account profit ........................ 3,934 108 1,785 227 554 All other operating income..................... 241,396 202,270 166,185 140,852 123,762 -------------------------------------------------------------------------- 920,946 797,946 692,963 623,023 544,416 -------------------------------------------------------------------------- OPERATING EXPENSES: Personnel costs................................ 306,893 273,247 249,075 225,747 215,911 All other operating expenses................... 330,027 268,672 237,758 222,099 196,365 -------------------------------------------------------------------------- 636,920 541,919 486,833 447,846 412,276 -------------------------------------------------------------------------- Income before tax, dividends on preferred stock of BPPR and cumulative effect of accounting changes................ 284,026 256,027 206,130 175,177 132,140 Income tax..................................... 74,461 70,877 59,769 50,043 28,151 -------------------------------------------------------------------------- Income before dividends on preferred stock of BPPR and cumulative effect of accounting changes................ 209,565 185,150 146,361 125,134 103,989 Dividends on preferred stock of BPPR........... 385 770 Income before cumulative effect of accounting changes.......................... 209,565 185,150 146,361 124,749 103,219 Cumulative effect of accounting changes........ 6,185 -------------------------------------------------------------------------- NET INCOME..................................... $ 209,565 $ 185,150 $ 146,361 $124,749 $109,404 ========================================================================== NET INCOME APPLICABLE TO COMMON STOCK.......... $ 201,215 $ 176,800 $ 138,011 $120,504 $109,404 ========================================================================== EARNINGS PER COMMON SHARE* Before effect of accounting changes......... $ 3.00 $ 2.68 $ 2.10 $ 1.84 $ 1.58 ========================================================================== Net income.................................. $ 3.00 $ 2.68 $ 2.10 $ 1.84 $ 1.67 ========================================================================== Dividends declared on common stock: Cash dividends per common share outstanding.... $ 0.80 $ 0.69 $ 0.58 $ 0.50 $ 0.45 ==========================================================================
*The average common shares used in the computation of earnings and cash dividend per common share were 67,018,482 for 1997; 66,022,312 for 1996; 65,816,300 for 1995; 65,596,486 for 1994; and 65,402,472 for 1993. F-31 52 STATISTICAL SUMMARY 1993-1997 AVERAGE BALANCE SHEET AND SUMMARY OF NET INTEREST INCOME ON A TAXABLE EQUIVALENT BASIS*
- ----------------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) 1997 1996 - ----------------------------------------------------------------------------------------------------------------------------------- AVERAGE AVERAGE Average Average BALANCE INTEREST RATE Balance Interest Rate ----------------------------------------------------------------------------- ASSETS Interest earning assets: Federal funds sold and securities and mortgages purchased under agreements to resell....................................... $ 595,715 $ 31,504 5.29% $ 878,138 $ 45,704 5.20% Time deposits with other banks.................... 34,271 2,181 6.36 12,562 770 6.13 Bankers' acceptances.............................. 2,463 238 9.66 2,202 223 10.13 ----------------------------------------------------------------------------- Total money market investments.................. 632,449 33,923 5.36 892,902 46,697 5.23 ----------------------------------------------------------------------------- U.S. Treasury securities.......................... 3,553,347 249,739 7.03 3,198,912 222,520 6.96 Obligations of other U.S. Government agencies and corporations....................... 967,973 69,709 7.20 531,711 34,725 6.53 Obligations of Puerto Rico, States and political subdivisions.......................... 141,625 9,716 6.86 231,363 11,224 4.85 Collateralized mortgage obligations and mortgage-backed securities...................... 1,150,214 72,245 6.28 772,278 46,434 6.01 Other .......................................... 114,201 7,718 6.76 95,985 5,483 5.71 ----------------------------------------------------------------------------- Total investment securities................... 5,927,360 409,127 6.90 4,830,249 320,386 6.63 ----------------------------------------------------------------------------- Trading account securities.......................... 301,618 19,770 6.55 372,196 23,004 6.18 ----------------------------------------------------------------------------- Loans (net of unearned income)...................... 10,548,207 1,087,466 10.31 9,210,964 930,891 10.11 ----------------------------------------------------------------------------- Total interest earning assets/ Interest income............................. 17,409,634 $1,550,286 8.90% 15,306,311 $1,320,978 8.63% ----------------------------------------------------------------------------- Total non-interest earning assets............. 1,009,510 994,771 ----------------------------------------------------------------------------- TOTAL ASSETS.................................. $18,419,144 $16,301,082 ============================================================================= LIABILITIES AND STOCKHOLDERS' EQUITY Interest bearing liabilities:....................... Savings and NOW accounts........................ $ 4,674,577 $ 147,321 3.15% $ 4,244,625 $ 131,499 3.10% Other time deposits............................... 4,023,313 219,207 5.45 4,163,416 218,722 5.25 Short-term borrowings............................ 4,280,900 237,738 5.55 3,464,892 184,682 5.33 Mortgages and notes payable...................... 1,345,650 83,936 6.24 757,604 46,417 6.13 Subordinated notes............................... 125,000 8,558 6.85 147,951 10,220 6.91 Guaranteed preferred beneficial interest in Popular North America's subordinated debentures..................................... 122,877 10,588 8.62 ----------------------------------------------------------------------------- Total interest bearing liabilities/ Interest expense........................... 14,572,317 707,348 4.85 12,778,488 591,540 4.63 ----------------------------------------------------------------------------- Total non-interest bearing liabilities....... 2,475,843 2,328,083 ----------------------------------------------------------------------------- Total liabilities............................ 17,048,160 15,106,571 ----------------------------------------------------------------------------- Preferred stock of BPPR.......................... ----------------------------------------------------------------------------- Stockholders' equity................................ 1,370,984 1,194,511 ----------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.......... $18,419,144 $16,301,082 ============================================================================= Net interest income on a taxable equivalent basis.................................. $ 842,938 $ 729,438 ----------------------------------------------------------------------------- Cost of funding earning assets...................... 4.06% 3.86% ----------------------------------------------------------------------------- Net interest yield.................................. 4.84% 4.77% ============================================================================= Effect of the taxable equivalent adjustment..... 58,983 48,125 ----------------------------------------------------------------------------- Net interest income per books....................... $ 783,955 $ 618,313 =============================================================================
* Shows the effect of the tax exempt status of some loans and investments on their yield, using the applicable statutory income tax rates. The computation considers the interest expense disallowance as required by the Puerto Rico Internal Revenue Code. This adjustment is shown in order to compare the yields of the tax exempt and taxable assets on a taxable basis. Note: Average loan balances include the average balance of non-accruing loans. No interest income is recognized for these loans in accordance with the Corporation's policy. F-32 53 POPULAR, INC.
- ----------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------- 1995 1994 1993 - ----------------------------------------------------------------------------------------------------------------------- Average Average Average Average Average Average Balance Interest Rate Balance Interest Rate Balance Interest Rate - ----------------------------------------------------------------------------------------------------------------------- $ 399,413 $ 22,823 5.71% $ 114,215 $ 4,858 4.25% $ 117,095 $ 4,115 3.51% 2,661 165 6.20 4,916 300 6.10 57,845 2,259 3.91 941 89 9.46 332 28 8.43 871 60 6.89 - ----------------------------------------------------------------------------------------------------------------------- 403,015 23,077 5.73 119,463 5,186 4.34 175,811 6,434 3.66 - ----------------------------------------------------------------------------------------------------------------------- 2,893,797 197,554 6.83 2,657,975 164,102 6.17 2,985,634 202,695 6.79 428,563 30,912 7.21 526,687 33,969 6.45 274,821 18,033 6.56 247,176 14,798 5.99 259,534 14,074 5.42 227,784 14,253 6.26 727,175 47,191 6.49 171,013 6,491 3.80 712,972 37,535 5.26 523,224 26,944 5.15 - ----------------------------------------------------------------------------------------------------------------------- 4,467,724 296,946 6.65 4,157,168 249,680 6.01 4,011,463 261,925 6.53 - ----------------------------------------------------------------------------------------------------------------------- 155,597 9,831 6.32 5,303 368 6.94 7,319 449 6.13 - ----------------------------------------------------------------------------------------------------------------------- 8,217,834 820,003 9.98 7,107,746 672,974 9.47 5,700,069 555,671 9.75 - ----------------------------------------------------------------------------------------------------------------------- 13,244,170 $1,149,857 8.68% 11,389,680 $928,208 8.15% 9,894,662 $824,479 8.33% - ----------------------------------------------------------------------------------------------------------------------- 874,013 835,850 789,091 - ----------------------------------------------------------------------------------------------------------------------- $14,118,183 $12,225,530 $10,683,753 ======================================================================================================================= $ 4,015,973 $ 126,548 3.15% $ 3,972,406 $116,858 2.94% $ 3,570,920 $107,454 3.01% 3,720,473 203,235 5.46 3,069,130 130,868 4.26 2,918,625 111,994 3.84 2,600,246 141,522 5.44 1,856,649 77,537 4.18 1,337,970 42,392 3.17 598,027 46,149 7.72 376,570 22,420 5.95 195,522 12,801 6.55 56,850 4,170 7.34 56,082 3,950 7.04 73,967 5,367 7.26 - ----------------------------------------------------------------------------------------------------------------------- 10,991,569 521,624 4.75 9,330,837 351,633 3.77 8,097,004 280,008 3.46 - ----------------------------------------------------------------------------------------------------------------------- 2,056,132 1,964,399 1,782,748 - ----------------------------------------------------------------------------------------------------------------------- 13,047,701 11,295,236 9,879,752 - ----------------------------------------------------------------------------------------------------------------------- 5,425 11,000 - ----------------------------------------------------------------------------------------------------------------------- 1,070,482 924,869 793,001 - ----------------------------------------------------------------------------------------------------------------------- $14,118,183 $12,225,530 $10,683,753 ======================================================================================================================= $ 628,233 $576,575 $544,471 - ----------------------------------------------------------------------------------------------------------------------- 3.94% 3.09% 2.83% - ----------------------------------------------------------------------------------------------------------------------- 4.74% 5.06% 5.50% ======================================================================================================================= 44,050 41,067 52,343 - ----------------------------------------------------------------------------------------------------------------------- $ 584,183 $535,508 $492,128 =======================================================================================================================
F-33 54 STATISTICAL SUMMARY 1995-1997 POPULAR, INC. QUARTERLY FINANCIAL DATA
1997 1996 - -------------------------------------------------------------------------------------------------------- FOURTH THIRD SECOND FIRST Fourth Third QUARTER QUARTER QUARTER QUARTER Quarter Quarter - -------------------------------------------------------------------------------------------------------- SUMMARY OF OPERATIONS (In thousands, except per common share information) Interest income ............ $404,619 $393,414 $359,005 $ 334,265 $ 332,854 $327,097 Interest expense ........... 194,919 190,409 168,399 153,621 154,445 154,861 ------------------------------------------------------------------------ Net interest income ...... 209,700 203,005 190,606 180,644 178,409 172,236 Provision for loan losses ................... 31,657 29,849 25,413 23,688 23,458 22,436 Non-interest income ........ 68,684 65,790 54,941 55,915 55,291 46,488 Gain (loss) on sale of investment securities .... 2,122 519 1,286 (1,659) (2,525) 4,911 Non-interest expense ....... 175,408 167,341 152,046 142,125 143,923 135,453 ------------------------------------------------------------------------ Income before income tax ...................... 73,441 72,124 69,374 69,087 63,794 65,746 Income taxes ............... 18,119 18,511 18,283 19,548 16,114 19,473 ------------------------------------------------------------------------ Net income ................. $ 55,322 $ 53,613 $ 51,091 $ 49,539 $ 47,680 $ 46,273 ======================================================================== Net income applicable to common stock .......... $ 53,234 $ 51,526 $ 49,003 $ 47,452 $ 45,593 $ 44,186 ======================================================================== Net income per common share .......... $ 0.78 $ 0.76 $ 0.74 $ 0.72 $ 0.69 $ 0.67 ------------------------------------------------------------------------ SELECTED AVERAGE BALANCES (In millions) Total assets ............... $ 19,745 $ 19,348 $ 17,625 $ 16,917 $ 16,852 $ 16,796 Loans ...................... 11,196 11,034 10,164 9,778 9,668 9,387 Interest earning assets .... 18,698 18,315 16,729 15,856 15,794 15,769 Deposits ................... 11,536 11,318 10,620 10,477 10,767 10,548 Interest bearing liabilities 15,717 15,639 13,737 13,147 13,145 13,285 ------------------------------------------------------------------------ SELECTED RATIOS Return on assets ........... 1.11% 1.10% 1.16% 1.19% 1.13% 1.10% Return on equity ........... 15.56 15.46 16.07 16.32 15.76 15.94
1996 1995 - ------------------------------------------------------------------------------------------------------- Second First Fourth Third Second First Quarter Quarter Quarter Quarter Quarter Quarter - ------------------------------------------------------------------------------------------------------- SUMMARY OF OPERATIONS (In thousands, except per common share information) Interest income ............ $309,975 $302,927 $298,311 $ 288,459 $ 268,818 $250,219 Interest expense ........... 141,767 140,467 142,191 140,044 126,698 112,691 ------------------------------------------------------------------------ Net interest income ...... 168,208 162,460 156,120 148,415 142,120 137,528 Provision for loan losses ................... 21,672 21,273 21,227 18,987 12,646 11,698 Non-interest income ........ 49,335 51,263 45,276 44,881 40,306 37,507 Gain (loss) on sale of investment securities .... (20) 729 3,306 1,950 66 46 Non-interest expense ....... 131,844 130,699 124,197 119,596 124,722 118,318 ----------------------------------------------------------------------- Income before income tax ...................... 64,007 62,480 59,278 56,663 45,124 45,065 Income taxes ............... 17,952 17,338 19,026 18,356 11,063 11,324 ---------------------------------------------------------------------- Net income ................. $ 46,055 $ 45,142 $ 40,252 $ 38,307 $ 34,061 $ 33,741 ======================================================================== Net income applicable to common stock .......... $ 43,967 $ 43,055 $ 38,164 $ 36,220 $ 31,973 $ 31,654 ======================================================================== Net income per common share .......... $ 0.67 $ 0.65 $ 0.58 $ 0.55 $ 0.49 $ 0.48 ------------------------------------------------------------------------ SELECTED AVERAGE BALANCES (In millions) Total assets ............... $ 15,988 $ 15,557 $ 15,183 $ 14,709 $ 13,616 $ 12,934 Loans ...................... 9,033 8,749 8,548 8,360 8,090 7,864 Interest earning assets .... 15,020 14,631 14,276 13,788 12,815 12,068 Deposits ................... 10,474 10,055 9,848 9,614 9,615 9,245 Interest bearing liabilities 12,464 12,210 11,912 11,596 10,552 9,871 ------------------------------------------------------------------------ SELECTED RATIOS Return on assets ........... 1.16% 1.17% 1.05% 1.03% 1.00% 1.06% Return on equity ........... 16.56 16.39 14.82 14.55 13.47 13.96
F-34 55 GLOSSARY OF TERMS 936 CORPORATIONS - Subsidiaries of U.S. firms operating in Puerto Rico and other offshore areas under Section 936 of the U.S. Internal Revenue Code. Section 936 provided certain tax benefits on Puerto Rico source earnings from the active conduct of a trade or business or from qualified investments. In August 1996, the U.S. Congress repealed Section 936 with a phase-out period of 10 years on the credit from earnings from active conduct of trade or business and repealed the exemption on qualified investment income. 936 DEPOSITS - Funds of 936 corporations deposited in banks usually in the form of time deposits. The restriction that these funds must be reinvested in eligible assets, if income derived from them was to be considered tax-exempt for U.S. and Puerto Rico's Industrial Incentive Act purposes, used to lower the rate on these funds as compared with interest rates paid on similar deposits. In August 1996, the U.S. Congress approved legislation that repealed the federal tax exemption on these funds, effective July 1, 1996, for taxable years beginning after December 31, 1995. BASIS POINT - Equals to one-hundredth of one percent. Used to express changes or differences in interest yields and rates. CORE DEPOSITS - A deposit category that includes all non-interest bearing deposits, savings deposits and certificates of deposit under $100,000. These deposits are considered a stable source of funds. EARNING ASSETS - Assets that earn interest, such as loans, investment securities, money market investments and trading account securities. EARNINGS PER COMMON SHARE - Net income less dividends on preferred stock of the Corporation, divided by the average number of common shares outstanding during the periods presented. ELIGIBLE ACTIVITIES - Loans, investments and other authorized uses of funds deposited by 936 Corporations, required by the related regulation, to promote activity in certain economic areas. GAP - The difference that exists at a specific period of time between the maturities or repricing terms of interest-sensitive assets and interest-sensitive liabilities. INTEREST-BEARING LIABILITIES - Liabilities on which interest is paid such as saving deposits, certificates of deposit, other time deposits, borrowings, subordinated notes and capital securities. INTEREST-SENSITIVE ASSETS/LIABILITIES - Interest-earning assets/interest-bearing liabilities for which interest rates are adjustable within a specified time period due to maturity or contractual arrangements. LEVERAGE RATIO - Ratio adopted by the Federal Reserve System to assist in the assessment of the capital adequacy of state member banks. This ratio is calculated by dividing Tier I capital by quarterly average assets. The quarterly average assets are reduced by goodwill, any other intangible asset deducted from Tier I capital and the disallowed portion of deferred tax assets. LIQUIDITY - A combination of assets that assures currently available supplies of funds necessary to meet deposit withdrawals, loan demand and repayment of borrowings as they become due. The need for liquid funds is normally satisfied from daily operations and the maturity management of money market investments and investment securities as well as from available sources of financing. NET CHARGE-OFFS - The amount of loans written-off as uncollectible, net of the recovery of loans previously written-off. NET INCOME APPLICABLE TO COMMON STOCK - Net income less dividends paid on the Corporation's preferred stock. NET INTEREST INCOME - The difference between interest income and fees on earning assets and interest expense on liabilities. NET INTEREST YIELD - A percentage computed by dividing net interest income by average earning assets. NON-PERFORMING ASSETS - Includes loans on which the accrual of interest income has been discontinued due to default on interest and/or principal payments or other factors indicative of doubtful collection, renegotiated loans and foreclosed real estate properties. RETURN ON ASSETS - Net income as a percentage of average total assets. RETURN ON EQUITY - Net income applicable to common stock as a percentage of average common stockholders' equity. F-35 56 RISK-BASED CAPITAL - Guidelines for the regulatory measurement of capital adequacy. These guidelines set forth how capital is to be measured and how total assets are to be risk-adjusted. Total risk-adjusted assets include assets and off-balance sheet items adjusted by the appropriate credit risk category, based on the type of obligor or, where relevant, the guarantor, or the nature of the collateral. SPREAD - A percentage difference or margin between the yield on earning assets and the effective interest rate paid on interest-bearing liabilities. STOCKHOLDERS' EQUITY - Excess of assets over liabilities that constitutes the stockholders ownership participation in the Corporation's financial resources. SUPPLEMENTARY (TIER II) CAPITAL - Consists of the allowance for loan losses and qualifying term subordinated notes. TANGIBLE EQUITY - Consists of stockholders' equity less intangible assets. TAXABLE EQUIVALENT BASIS - An adjustment of income on tax-exempt earning assets to an amount that would yield the same after-tax income had the income been subject to taxation. The result is to equate the true earnings value of tax-exempt and taxable income. TIER I CAPITAL - Consists of common stockholders' equity (including the related surplus, retained earnings and capital reserves), non-cumulative perpetual preferred stock less goodwill, other non-qualifying intangible assets and the disallowed portion of deferred tax assets. YIELD - Percentage denoting actual return on earning assets. F-36 57 REPORT OF INDEPENDENT ACCOUNTANTS San Juan, Puerto Rico February 20, 1998 To the Board of Directors and Stockholders of Popular, Inc. In our opinion, the accompanying consolidated statements of condition and the related consolidated statements of income, of cash flows and of changes in stockholders' equity present fairly, in all material respects, the financial position of Popular, Inc. and its subsidiaries at December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Corporation's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /S/ Price Waterhouse Price Waterhouse Stamp 1457872 of the P.R. Society of Certified Public Accountants has been affixed to the file copy of this report. F-37 58 CONSOLIDATED STATEMENTS OF CONDITION POPULAR, INC.
December 31, ---------------------------- 1997 1996 - --------------------------------------------------------------------------------------------------------------- (Dollars in thousands, except per share information) ASSETS Cash and due from banks ........................................................ $ 463,151 $ 492,368 --------------------------- Money market investments: Federal funds sold and securities and mortgages purchased under agreements to resell ....................................................... 802,803 778,597 Time deposits with other banks .............................................. 9,013 19,023 Bankers' acceptances ........................................................ 2,274 2,656 --------------------------- 814,090 800,276 --------------------------- Trading securities, at market value ............................................ 222,303 292,150 --------------------------- Investment securities available-for-sale, at market value ...................... 5,239,005 3,415,934 --------------------------- Investment securities held-to-maturity, at cost (market value $409,798; 1996 - $1,197,641) .......................................................... 408,993 1,197,066 --------------------------- Loans held-for-sale ............................................................ 265,204 255,129 --------------------------- Loans .......................................................................... 11,457,675 9,854,911 Less - Unearned income ...................................................... 346,272 331,012 Allowance for loan losses ............................................ 211,651 185,574 --------------------------- 10,899,752 9,338,325 --------------------------- Premises and equipment ......................................................... 364,892 356,697 Other real estate .............................................................. 18,012 6,076 Customers' liabilities on acceptances .......................................... 1,801 3,100 Accrued income receivable ...................................................... 118,677 95,487 Other assets ................................................................... 252,040 380,247 Intangible assets .............................................................. 232,587 131,248 --------------------------- $ 19,300,507 $16,764,103 =========================== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits: Non-interest bearing ....................................................... $ 2,546,836 $ 2,330,704 Interest bearing ........................................................... 9,202,750 8,432,571 --------------------------- 11,749,586 10,763,275 Federal funds purchased and securities sold under agreements to repurchase .. 2,723,329 1,875,465 Other short-term borrowings ................................................. 1,287,435 1,404,006 Notes payable ............................................................... 1,403,696 986,713 Senior debentures ........................................................... 30,000 Acceptances outstanding ..................................................... 1,801 3,100 Other liabilities ........................................................... 356,568 314,012 --------------------------- 17,522,415 15,376,571 --------------------------- Subordinated notes .......................................................... 125,000 125,000 --------------------------- Preferred beneficial interest in Popular North America's junior subordinated deferrable interest debentures guaranteed by the Corporation ............. 150,000 --------------------------- Stockholders' equity: Preferred stock, $25 liquidation value; 10,000,000 shares authorized; 4,000,000 issued and outstanding ........................................... 100,000 100,000 Common stock, $6 par value; authorized 180,000,000 shares; issued and outstanding 67,682,704 (1996 - 66,088,506) ...................... 412,029 396,531 Surplus ..................................................................... 602,023 496,582 Retained earnings ........................................................... 395,253 267,719 Treasury stock-at cost ...................................................... (39,559) Unrealized gains on investment securities available-for-sale, net of deferred taxes of $11,180 (1996 - $1,490) ........................................... 33,346 1,700 --------------------------- 1,503,092 1,262,532 --------------------------- $ 19,300,507 $16,764,103 ===========================
The accompanying notes are an integral part of the consolidated financial statements. F-38 59 CONSOLIDATED STATEMENTS OF INCOME POPULAR, INC.
Year ended December 31, ----------------------------------------- 1997 1996 1995 - --------------------------------------------------------------------------------------------------------- (In thousands, except per share information) INTEREST INCOME: Loans .................................................... $1,080,408 $ 924,076 $ 813,137 Money market investments ................................. 33,923 46,697 23,077 Investment securities .................................... 358,736 280,610 259,941 Trading securities ....................................... 18,236 21,470 9,652 ----------------------------------------- 1,491,303 1,272,853 1,105,807 ----------------------------------------- INTEREST EXPENSE: Deposits ................................................. 366,528 350,221 329,783 Short-term borrowings .................................... 237,738 184,682 141,522 Long-term debt ........................................... 103,082 56,637 50,319 ----------------------------------------- 707,348 591,540 521,624 ----------------------------------------- Net interest income ........................................ 783,955 681,313 584,183 Provision for loan losses .................................. 110,607 88,839 64,558 ----------------------------------------- Net interest income after provision for loan losses ........ 673,348 592,474 519,625 Service charges on deposit accounts ...................... 94,141 85,846 78,607 Other service fees ....................................... 98,650 77,071 63,725 Gain on sale of investment securities .................... 2,268 3,094 5,368 Trading account profit ................................... 3,934 108 1,785 Other operating income ................................... 48,605 39,353 23,853 ----------------------------------------- 920,946 797,946 692,963 ----------------------------------------- OPERATING EXPENSES: Personnel costs: Salaries ................................................ 211,741 185,946 172,504 Profit sharing .......................................... 25,684 22,692 19,003 Pension and other benefits .............................. 69,468 64,609 57,568 ----------------------------------------- 306,893 273,247 249,075 Net occupancy expense .................................... 39,617 36,899 32,850 Equipment expenses ....................................... 66,446 57,186 47,854 Other taxes .............................................. 30,283 23,214 20,872 Professional fees ........................................ 46,767 36,953 28,677 Communications ........................................... 33,325 26,470 23,106 Business promotion ....................................... 33,569 26,229 17,801 Printing and supplies .................................... 15,539 11,964 11,069 Other operating expenses ................................. 41,607 31,703 35,325 Amortization of intangibles .............................. 22,874 18,054 20,204 ----------------------------------------- 636,920 541,919 486,833 ----------------------------------------- Income before income tax ................................... 284,026 256,027 206,130 Income tax ................................................. 74,461 70,877 59,769 ----------------------------------------- NET INCOME.................................................. $ 209,565 $ 185,150 $ 146,361 ========================================= NEW INCOME APPLICABLE TO COMMON STOCK ...................... $ 201,215 $ 176,800 $ 138,011 ========================================= EARNINGS PER COMMON SHARE: NEW INCOME .............................................. $ 3.00 $ 2.68 $ 2.10 =========================================
The accompanying notes are an integral part of the consolidated financial statements. F-39 60 CONSOLIDATED STATEMENTS OF CASH FLOWS POPULAR, INC.
Year ended December 31, ---------------------------------------- 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income .................................................... $ 209,565 $ 185,150 $ 146,361 ---------------------------------------- Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization of premises and equipment ... 54,523 48,481 44,448 Provision for loan losses ................................. 110,607 88,839 64,558 Amortization of intangibles ............................... 22,874 18,054 20,204 Gain on sale of investment securities available-for-sale .. (2,268) (3,094) (5,368) Loss (gain) on disposition of premises and equipment ...... 2,681 (123) 150 Gain on sale of loans ..................................... (23,315) (11,060) (8,966) Amortization of premiums and accretion of discounts on investments .......................................... 2,746 8,538 (2,325) Amortization of deferred loan origination fees and costs .. (3,019) (3,096) 7,131 Net decrease (increase) in trading securities ............ 69,847 38,524 (97,973) Increase in loans held-for-sale ........................... (10,075) (142,323) (36,244) Net (increase) decrease in accrued income receivable ...... (15,872) 18,665 (24,378) Net decrease (increase) in other assets ................... 175,286 (221,070) (8,640) Net increase in interest payable .......................... 6,668 11,765 2,077 Net (decrease) increase in current and deferred taxes ..... (28,555) (19,979) 1,410 Net increase in postretirement benefit obligation ......... 7,323 7,977 6,979 Net increase in other liabilities ......................... 4,887 29,284 6,121 ---------------------------------------- Total adjustments .................................. 374,338 (130,618) (30,816) ---------------------------------------- Net cash provided by operating activities .......... 583,903 54,532 115,545 ---------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Net decrease in money market investments ...................... 9,671 11,110 44,298 Purchases of investment securities held-to-maturity ........... (68,040,431) (28,849,896) (11,665,837) Maturities of investment securities held-to-maturity .......... 68,835,925 29,302,469 11,754,330 Purchases of investment securities available-for-sale ......... (8,635,781) (5,396,828) (1,367,401) Maturities of investment securities available-for-sale ........ 2,191,521 2,297,528 86,379 Sales of investment securities available-for-sale ............. 5,212,194 2,896,060 286,045 Net disbursements on loans .................................... (1,468,552) (1,501,808) (1,155,497) Proceeds from sale of loans ................................... 521,853 515,357 244,682 Acquisition of loan portfolios ................................ (48,481) (16,983) (66,922) Assets acquired, net of cash .................................. (83,404) (7,164) (29,189) Acquisition of premises and equipment ......................... (120,226) (86,162) (51,318) Proceeds from sale of premises and equipment .................. 68,082 9,662 6,888 ---------------------------------------- Net cash used in investing activities .............. (1,557,629) (826,655) (1,913,542) ---------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net (decrease) increase in deposits ........................... (68,957) 823,907 680,847 Net deposits acquired ......................................... 163,504 Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase .............. 790,607 (1,125,413) 771,382 Net (decrease) increase in other short-term borrowings ........ (116,571) 949,300 (144,028) Proceeds from issuance of notes payable ....................... 1,246,237 423,670 258,181 Payment of notes payable ...................................... (932,853) (167,385) (11) Payment of senior debentures .................................. (30,000) Payment of subordinated notes ................................. (50,000) Proceeds from issuance of Capital Securities .................. 150,000 Proceeds from issuance of subordinated notes .................. 125,000 Dividends paid ................................................ (59,037) (51,896) (44,521) Proceeds from issuance of common stock ........................ 4,642 4,135 3,500 Treasury stock acquired ....................................... (39,559) ---------------------------------------- Net cash provided by financing activities .......... 944,509 806,318 1,813,854 ---------------------------------------- Net (decrease) increase in cash and due from banks .............. (29,217) 34,195 15,857 Cash and due from banks at beginning of period .................. 492,368 458,173 442,316 ---------------------------------------- Cash and due from banks at end of period ........................ $ 463,151 $ 492,368 $ 458,173 ========================================
The accompanying notes are an integral part of the consolidated financial statements. F-40 61 CONSOLIDATED STATEMENTS OF CHANGES POPULAR, INC. IN STOCKHOLDERS' EQUITY
Year ended December 31, ---------------------------------------- 1997 1996 1995 - -------------------------------------------------------------------------------------------------------------- (In thousands) PREFERRED STOCK Balance at beginning and end of year .......................... $ 100,000 $ 100,000 $ 100,000 ---------------------------------------- COMMON STOCK Balance at beginning of year .................................. 396,531 197,692 197,029 Transfer from retained earnings resulting from stock split .... 198,004 Common stock issued in acquisitions ........................... 14,774 Common stock issued under Dividend Reinvestment Plan .......... 724 835 663 ---------------------------------------- Balance at end of year .............................. 412,029 396,531 197,692 ---------------------------------------- SURPLUS: Balance at beginning of year .................................. 496,582 427,282 409,445 Proceeds from common stock issued under Dividend Reinvestment Plan .................................. 3,918 3,300 2,837 Common stock issued in acquisitions ........................... 81,523 Transfer from retained earnings ............................... 20,000 16,000 15,000 Transfer from capital reserves ................................ 50,000 ---------------------------------------- Balance at end of year ............................. 602,023 496,582 427,282 ---------------------------------------- RETAINED EARNINGS: Balance at beginning of year .................................. 267,719 350,480 272,458 Net income .................................................... 209,565 185,150 146,361 Cash dividends declared on common stock ....................... (53,681) (45,557) (37,846) Cash dividends declared on preferred stock .................... (8,350) (8,350) (8,350) Transfer to common stock resulting from stock split ........... (198,004) Transfer to capital reserves .................................. (7,143) Transfer to surplus ........................................... (20,000) (16,000) (15,000) ---------------------------------------- Balance at end of year ............................. 395,253 267,719 350,480 ---------------------------------------- UNREALIZED HOLDING GAINS (LOSSES) ON SECURITIES AVAILABLE-FOR-SALE, NET OF DEFERRED TAXES: Balance at beginning of year .................................. 1,700 16,243 (19,366) Net change in the fair value of investment securities available-for-sale, net of deferred taxes ................... 31,646 (14,543) 35,609 ---------------------------------------- Balance at end of year ............................. 33,346 1,700 16,243 ---------------------------------------- TREASURY STOCK-AT COST .......................................... (39,559) ---------------------------------------- CAPITAL RESERVES: Balance at beginning of year .................................. 50,000 42,857 Transfer from retained earnings ............................... 7,143 Transfer to surplus ........................................... (50,000) ---------------------------------------- Balance at end of year ............................. 50,000 ---------------------------------------- Total stockholders' equity ...................................... $1,503,092 $1,262,532 $1,141,697 ========================================
The accompanying notes are an integral part of the consolidated financial statements. F-41 62 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS POPULAR, INC. NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: The accounting and reporting policies of Popular, Inc. (formerly BanPonce Corporation) and its subsidiaries (the Corporation) conform with generally accepted accounting principles and with general practices within the banking industry. The following is a description of the more significant of these policies: CONSOLIDATION The consolidated financial statements include the accounts of Popular, Inc. and its wholly-owned subsidiaries. The following summarizes the Corporation's organization: - Popular, Inc. (holding company) - Banco Popular de Puerto Rico (BPPR) - Popular Leasing and Rental, Inc. - Popular Finance, Inc. - Popular Mortgage, Inc. - Popular Securities Incorporated - Popular International Bank, Inc. - ATH Costa Rica - Popular North America, Inc. - Banco Popular, N.A. (California) - Banco Popular, N.A. (Florida) - Banco Popular, N.A. (Texas) - Banco Popular North America - Banco Popular, Illinois -Popular Leasing, USA - Banco Popular, FSB - Equity One All intercompany accounts and transactions have been eliminated in consolidation. ACQUISITIONS On April 30, 1997, the Corporation acquired Seminole National Bank in Sanford, Florida. At the date of acquisition, this bank operated three branches in Sanford and Orlando, with $19 million in loans and $23 million in deposits. On May 31, 1997, the Corporation acquired National Bancorp, Inc., the holding company of American Midwest Bank located in Chicago, Illinois. As part of this acquisition each outstanding share of National Bancorp, Inc. was converted into 8,678 shares of the Corporation's common stock, resulting in the issuance of 918,263 common shares. Also, on May 31, 1997, the Corporation completed the acquisition of CBC Bancorp, which had two banking subsidiaries, Capitol Bank & Trust and Capitol Bank of Westmont. These acquisitions in the State of Illinois added $261 million in loans and $408 million in deposits. On June 30, 1997, the Corporation completed the acquisition of Roig Commercial Bank (RCB), headquartered in Humacao, Puerto Rico. The merger agreement stipulated a payment of 50% in cash and the other 50% in common stock of Popular, Inc. Each outstanding share of RCB was converted into 5.14695 shares of the Corporation's common stock or $208.12987 in cash depending on RCB's shareholders' elections. As a result, 1,544,009 common shares of the Corporation were issued to RCB's shareholders. This acquisition added $361 million in loans and $584 million in deposits. On December 1, 1997, the Corporation acquired Houston Bancorporation, the holding company of Citizens National Bank. This bank operated one branch located in Houston, Texas. This acquisition added $39 million in loans and $45 million in deposits. In September 1996, the Corporation completed the acquisition of Banco Popular, N.A. (California), formerly Commerce National Bank, adding $23 million in loans and $63 million in deposits. At the acquisition date, this bank operated three branches located in City of Commerce, Montebello and Downey. All of the above acquisitions were accounted for as purchases and therefore results were included in the consolidated statements of income from the date of acquisition. F-42 63 NATURE OF OPERATIONS Popular, Inc. is a bank holding company which provides a wide variety of financial services through its subsidiaries. BPPR, the Corporation's largest banking subsidiary, is a full-service commercial bank and Puerto Rico's largest banking institution, with a delivery system of 201 branches throughout Puerto Rico, 29 branches in New York, seven branches in the U.S. Virgin Islands and one branch in the British Virgin Islands. Banco Popular, Illinois, a banking subsidiary of Banco Popular North America, operates 13 branches in the State of Illinois, Banco Popular, N.A. (California), operates six branches in the State of California, Banco Popular, N.A. (Florida) operates six branches in the State of Florida, while Banco Popular, N.A. (Texas) operates one branch in the State of Texas. In addition, Banco Popular, FSB, a federal savings bank, operates eight branches in the State of New Jersey. Also, the Corporation offers consumer finance services through its subsidiaries, Equity One, Inc., Popular Mortgage, Inc. and Popular Finance, Inc. Equity One, Inc. is a diversified mortgage and consumer finance company engaged in the business of granting personal and mortgage loans and providing dealer financing through 117 offices located in 30 states in the U.S. mainland. Popular Mortgage is a mortgage loan company with three offices in Puerto Rico, and Popular Finance, Inc. is a small loan company with 44 offices in Puerto Rico. The Corporation is also engaged in vehicle and equipment leasing, through 10 offices in Puerto Rico operated by Popular Leasing and Rental, Inc. and equipment leasing through seven offices operated by Popular Leasing, USA. Moreover, the Corporation is engaged in investment banking and broker / dealer activities through its subsidiary Popular Securities. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. TRADING SECURITIES Financial instruments, including, to a limited extent, derivatives such as interest rate futures and options contracts, are utilized by the Corporation in trading activities and are carried at market value. In conjunction with mortgage banking activities, the Corporation records the securitization of mortgage loans held-for-sale as a sale of mortgage loans and the purchase of a mortgage-backed security classified as a trading security. Realized and unrealized changes in market values are recorded separately in the trading profit or loss account in the period in which the changes occur. Interest revenue and expense arising from trading instruments are included in the income statement as part of net interest income rather than in the trading profit or loss account. Securities sold but not yet purchased, which represent the Corporation's obligation to deliver securities sold which were not owned at the time of sale, are recorded at market value. INVESTMENT SECURITIES The investment securities are classified in three categories and accounted for as follows: - - Debt securities that the enterprise has the positive intent and ability to hold to maturity are classified as securities held-to-maturity and reported at amortized cost. The Corporation may not sell or transfer held-to-maturity securities without calling into question its intent to hold other debt securities to maturity, unless a non-recurring or unusual event that could not have been reasonably anticipated has occurred. - - Debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings. - - Debt and equity securities not classified as either securities held-to-maturity or trading securities are classified as securities available-for-sale and reported at fair value, with unrealized gains and losses excluded from earnings and reported net of deferred taxes in a separate component of stockholders' equity. The amortization of premiums is deducted and the accretion of discounts is added to interest income based on the interest method over the outstanding period of the related securities. Net realized gains or losses on sales of investment securities and F-43 64 unrealized loss valuation adjustments considered other than temporary, if any, on securities available-for-sale and held-to maturity are reported separately in the statement of income. The Corporation anticipates prepayments of principal in the calculation of the effective yield and average maturity for collateralized mortgage obligations and mortgage-backed securities. RISK MANAGEMENT INSTRUMENTS The Corporation occasionally uses derivative financial instruments, such as interest rate caps and swaps, in the management of its interest rate exposure. These instruments are accounted for primarily on an accrual basis. Under the accrual method, interest income or expense on the derivative contract is accrued and there is no recognition of unrealized gains and losses on the derivative in the balance sheet. Premiums on option contracts are amortized to interest income or interest expense over the life of such contracts. Income and expenses arising from the instruments are recorded in the category appropriate to the related asset or liability. Gains and losses related to contracts that are effective hedges are deferred and recognized in income in the same period as gains and losses on the hedged item. Gains and losses on early termination of contracts that modify the characteristics of specified assets or liabilities are deferred and amortized as an adjustment to the yield of the related assets or liabilities over their remaining lives. LOANS HELD-FOR-SALE Loans held-for-sale are stated at the lower of cost or market, cost being determined based on the outstanding loan balance less unearned income, and fair market value determined on an aggregate basis according to secondary market prices. The amount by which cost exceeds market value, if any, is accounted for as a valuation allowance with changes included in the determination of net income for the period in which the change occurs. LOANS Loans are stated at the outstanding balance less unearned income and allowance for loan losses. Loan origination fees and costs incurred in the origination of new loans are deferred and amortized using the interest method over the life of the loan as an adjustment to interest yield. Unearned interest on lease financing and installment loans is recognized as income on a basis which results in approximate level rates of return over the term of the loans. Recognition of interest income on commercial and construction loans is discontinued when loans are 60 days or more in arrears on payments of principal or interest or when other factors indicate that collection of principal and interest is doubtful. Interest accrual for lease financing, conventional mortgage loans and close-end consumer loans is ceased when loans are 90 days or more past due. Loans designated as non-accruing are not returned to an accrual status until interest is received on a current basis and those factors indicative of doubtful collection cease to exist. Close-end consumer loans and leases are charged-off against the allowance for loan losses after becoming 120 days past due. Open-end (revolving credit) consumer loans are charged-off after becoming 180 days past due. Income is generally recognized on open-end loans until the loans are charged-off. LEASE FINANCING The Corporation leases passenger and commercial vehicles and equipment to individual and corporate customers. The finance method of accounting is used to recognize revenue on lease contracts that meet the criteria specified in SFAS 13, "Accounting for Leases", as amended. Aggregate rentals due over the term of the leases less unearned income are included in finance lease contracts receivable. Unearned income is amortized using a method which results in approximate level rates of return on the principal amounts outstanding. Finance lease origination fees and costs are deferred and amortized over the average life of the portfolio as an adjustment to the yield. All other leases are accounted for under the operating method. Under this method, revenue is recognized as it becomes due under the terms of the agreement. ALLOWANCE FOR LOAN LOSSES The Corporation follows a systematic methodology to establish and evaluate the adequacy of the allowance for loan losses to provide for inherent losses in the loan portfolio as well as in other credit-related balance sheet and off-balance sheet financial instruments. This methodology includes the consideration of factors such as economic conditions, portfolio risk characteristics, prior loss experience, results of periodic credit reviews of individual loans and financial accounting standards. F-44 65 The provision for loan losses charged to current operations is based on an evaluation of the risk characteristics of the loan portfolio and the economic conditions. Loan losses are charged and recoveries are credited to the allowance for loan losses. The Corporation has defined impaired loans as all loans with interest and/or principal past due 90 days or more and other specific loans for which, based on current information and events, it is probable that the debtor will be unable to pay all amounts due according to the contractual terms of the loan agreement. Loan impairment is measured based on the present value of expected future cash flows discounted at the loan's effective rate, on the observable market price or, on the fair value of the collateral if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment based on past experience. All other loans are evaluated on a loan-by-loan basis. Once a specific measurement methodology is chosen it is consistently applied unless there is a significant change in the financial position of the borrower. Impaired loans for which the discounted cash flows, collateral value or market price equals or exceeds its carrying value do not require an allowance. The allowance for impaired loans is part of the Corporation's overall allowance for loan losses. Cash payments received on impaired loans are recorded in accordance with the contractual terms of the loan. The principal portion of the payment is used to reduce the principal balance of the loan, whereas the interest portion is recognized as interest income. However, when management believes the ultimate collectibility of principal is in doubt, the interest portion is then applied to principal. MORTGAGE BANKING Mortgage loan servicing includes collecting monthly mortgagor payments, forwarding payments and related accounting reports to investors, collecting escrow deposits for the payment of mortgagor property taxes and insurance, and paying taxes and insurance from escrow funds when due. Also, the Corporation is required to foreclose on loans in the event of default by the mortgagor, and to make full payment on foreclosed loans. No asset or liability is recorded by the Corporation for mortgages serviced, except for mortgage servicing rights, advances to investors and escrow balances. Mortgage servicing rights, an intangible asset, represents the cost of acquiring the contractual right to service loans for others. Mortgage loan servicing fees, which are based on a percentage of the principal balances of the mortgages serviced, are credited to income as mortgage payments are collected. On January 1, 1996, the Corporation adopted SFAS 122, "Accounting for Mortgage Servicing Rights." This statement was superseded by SFAS 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities" adopted by the Corporation in January 1997. This statement requires that mortgage banking enterprises recognize as separate assets the rights to service mortgage loans for others, whether those servicing rights are originated or purchased. The total cost of mortgage loans to be sold with servicing rights retained is allocated to the mortgage servicing rights and the loans (without the mortgage servicing rights), based on their relative fair values. Mortgage servicing rights are amortized in proportion to and over the period of estimated net servicing income. In addition, it requires mortgage banking enterprises to assess capitalized mortgage servicing rights for impairment based on the fair value of those rights. To estimate the fair value of mortgage servicing rights the Corporation considers prices for similar assets and the present value of expected future cash flows associated with the servicing rights calculated using assumptions that market participants would use in estimating future servicing income and expense. For purposes of evaluating and measuring impairment of capitalized mortgage servicing rights, the Corporation stratifies such rights based on predominant risk characteristics of underlying loans, such as loan type, rate and term. The amount of impairment recognized, if any, is the amount by which the capitalized mortgage servicing rights per stratum exceed its estimated fair value. Impairment is recognized through a valuation allowance. Total loans serviced were $5,400,000,000 at December 31, 1997 (1996 - $5,110,000,000). The carrying value, estimated fair value and valuation allowance of capitalized mortgage servicing rights were $29,772,000, $36,259,000, and $14,000, respectively, at December 31, 1997. PREMISES AND EQUIPMENT Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed on a straight-line basis over the estimated useful life of each type of asset. Amortization of leasehold improvements is computed over the terms of the respective leases or the estimated useful lives of the improvements, whichever is shorter. Costs of maintenance and repairs which do not improve or extend the life of the respective assets are expensed as incurred. Costs of renewals and betterments are capitalized. When assets are disposed of, their cost and related accumulated depreciation are removed from the accounts and any gain or loss is reflected in the operations as realized or incurred, respectively. F-45 66 On January 1, 1996, the Corporation adopted SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This statement requires that long-lived assets, certain identifiable intangibles and goodwill related to those assets to be held and used, and long-lived assets to be disposed of by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. This statement excludes financial instruments, long-term customer relationships of financial institutions, mortgage and other servicing rights and deferred tax assets. For the year ended December 31, 1997, the Corporation recorded an impairment loss of $3,295,000 (1996- $700,000), as further explained in Note 8, based on the provisions of this pronouncement. OTHER REAL ESTATE Other real estate comprises properties acquired through foreclosure. Upon foreclosure, the recorded amount of the loan is written-down, if required, to the appraised value less estimated costs of disposal of the real estate acquired by charging the allowance for loan losses. Subsequent to foreclosure, the properties are carried at the lower of carrying value or fair value less estimated costs of disposal. Gains or losses on the sale of these properties are credited or charged to expense of operating other real estate. The cost of maintaining and operating such properties is expensed as incurred. INTANGIBLE ASSETS Intangible assets consist of goodwill and other identifiable intangible assets acquired, mainly core deposits and mortgage servicing rights. The values of core deposits, assembled work force and credit customer relationships are amortized using various methods over the periods benefited, which range from 4 to 10 years. Goodwill represents the excess of the Corporation's cost of purchased operations over the fair value of the net assets acquired and is amortized on the straight-line basis over periods ranging from 7 to 15 years. SECURITIES SOLD/PURCHASED UNDER AGREEMENTS TO REPURCHASE/RESALE Repurchase and resale agreements are treated as financing transactions and are carried at the amounts at which the securities will be reacquired or resold as specified in the respective agreements. It is the Corporation's policy to take possession or control of securities purchased under resale agreements. The Corporation monitors the market value of the underlying securities as compared to the related receivable, including accrued interest, and requests additional collateral where deemed appropriate. INCOME TAXES The Corporation uses an asset and liability approach to the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Corporation's financial statements or tax returns. Deferred income tax assets and liabilities are determined for differences between financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future. The computation is based on enacted tax laws and rates applicable to periods in which the temporary differences are expected to be recovered or settled. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. EMPLOYEES' RETIREMENT PLANS The Corporation has trusteed, non-contributory retirement and other benefit plans covering substantially all full-time employees. Pension costs are computed on the basis of accepted actuarial methods and are charged to current operations. Net pension costs are based on various actuarial assumptions regarding future experience under the plan, which include costs for services rendered during the period, interest costs and return on plan assets, as well as deferral and amortization of certain items such as actuarial gains or losses. The funding policy is to contribute funds to the plan as necessary to provide for services to date and for those expected to be earned in the future. To the extent that these requirements are fully covered by assets in the plan, a contribution may not be made in a particular year. OTHER POSTRETIREMENT BENEFIT PLANS The Corporation provides certain health and life insurance benefits for eligible retirees and their dependents. The cost of postretirement benefits, which is determined based on actuarial assumptions and estimates of the costs of providing these benefits in the future, is accrued during the years that the employee renders the required service. F-46 67 STOCK COMPENSATION On January 1, 1996, the Corporation adopted SFAS 123, "Accounting for Stock-Based Compensation." SFAS 123 establishes a fair value-based method of accounting for stock-based compensation plans. It encourages entities to adopt this method in lieu of the provisions of Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees", for all arrangements under which employees receive shares of stock or other equity instruments of the employer or the employer incurs liabilities to employees in amounts based on the price of its stock. BPPR provides a stock-based compensation plan for its Senior Management. It is a three-year incentive plan under which shares of stock of the Corporation are granted if long-term corporate performance and objectives are met. For the year ended December 31, 1997, the Corporation recognized an expense of $1,493,000 (1996- $837,000) related to this plan, determined on the estimated fair value of the stock. TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENT OF LIABILITIES In January 1997, the Corporation adopted, SFAS 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities," as amended by SFAS 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125." This statement provides accounting and reporting standards for transfers and servicing of financial assets and extinguishment of liabilities. These standards are based on a consistent application of a financial components approach that focuses on control. Under that approach, after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. Certain provisions related with repurchase agreements, dollar-roll, securities lending, and similar transactions shall be effective for transfers of financial assets occurring after December 31, 1997. The adoption of this statements did not have a material effect on the consolidated financial statements of the Corporation. DISCLOSURE OF INFORMATION ABOUT CAPITAL STRUCTURE In February 1997, the Financial Accounting Standards Board (FASB) issued SFAS 129, "Disclosure of Information about Capital Structure." This statement established standards for disclosing information about an entity's capital structure and is effective for financial statements for periods ending after December 15, 1997. However, it contains no change in disclosure requirements for entities that were previously subject to the requirements of APB Opinions 10 and 15 and SFAS 47. EARNINGS PER COMMON SHARE Earnings per common share are computed by dividing net income, reduced by dividends on preferred stock, by the weighted average number of common shares of the Corporation outstanding during the year. Effective in 1997, the Corporation adopted SFAS 128, "Earnings per Share." This statement establishes standards for computing and presenting earnings per share (EPS) and applies to entities with publicly held common stock or potential common stock. It simplifies the standards for computing earnings per share previously found in APB Opinion 15, "Earnings per Share," and makes them comparable to international EPS standards. SFAS 128 replaces the presentation of primary earnings per share with a presentation of basic EPS. It also requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. STATEMENT OF CASH FLOWS For purposes of reporting cash flows, cash and cash equivalents include cash on hand and amounts due from banks. RECLASSIFICATION Certain minor reclassifications have been made to the 1996 and 1995 consolidated financial statements to conform with the 1997 presentation. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income." This statement establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains, and losses) in a full set of gen- F-47 68 eral-purpose financial statements. Comprehensive income has been defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances, except those resulting from investments by owners and distributions to owners. This pronouncement requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. The pronouncement does not require a specific format for the financial statement but requires that an enterprise display an amount representing total comprehensive income for the period in that financial statement. This statement is effective for fiscal years beginning after December 15, 1997, and reclassification of financial statements for earlier periods provided for comparative purposes is required. This statement affects only financial statement presentation. Also in June 1997, the FASB issued SFAS 131, "Disclosures about Segments of an Enterprise and Related Information." This statement establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. This statement supersedes SFAS 14, "Financial Reporting for Segments of a Business Enterprise," but retains the requirements to report information about major customers. This statement is effective for financial statements for periods beginning after December 15, 1997, and requires comparative information for earlier years. This statement affects only financial statement presentation and, therefore, management understands that its adoption will not have a material effect, if any, on the Corporation's financial position or results of operations. NOTE 2 - CASH AND DUE FROM BANKS: The Corporation's subsidiary banks are required by regulatory agencies to maintain average reserve balances. The amount of those average reserve balances was approximately $375,820,000 at December 31, 1997 (1996 - $335,676,000). NOTE 3 - INVESTMENT SECURITIES AVAILABLE-FOR-SALE: The amortized cost, gross unrealized gains and losses, approximate market value (or fair value for certain investment securities where no market quotations are available), weighted average yield and maturities of investment securities available-for-sale as of December 31, 1997 and 1996 (1995 - only market value is presented) were as follows: F-48 69
1997 ------------------------------------------------------------ Weighted Amortized Unrealized Unrealized Market average cost gains losses value yield ------------------------------------------------------------ (In thousands) U.S. Treasury securities (average maturity of 1 year and 11 months): Within 1 year.................................................. $ 361,577 $ 938 $ 13 $ 362,502 6.21% After 1 to 5 years............................................. 2,746,232 19,625 3 2,765,854 6.11 ------------------------------------------------------------ 3,107,809 20,563 16 3,128,356 6.12 ------------------------------------------------------------ Obligations of other U.S. Government agencies and corporations (average maturity of 4 years and 6 months): Within 1 year.................................................. 199,100 50 169 198,981 5.73 After 1 to 5 years............................................. 306,661 1,108 124 307,645 6.27 After 5 to 10 years............................................ 301,062 790 1,988 299,864 6.82 ------------------------------------------------------------ 806,823 1,948 2,281 806,490 6.34 ------------------------------------------------------------ Obligations of Puerto Rico, States and political sub- divisions (average maturity of 3 years and 7 months): Within 1 year.................................................. 9,820 33 30 9,823 5.22 After 1 to 5 years............................................. 7,437 150 31 7,556 5.71 After 5 to 10 years............................................ 17,944 266 18,210 6.29 After 10 years................................................. 25,437 208 96 25,549 6.32 ------------------------------------------------------------ 60,638 657 157 61,138 6.06 ------------------------------------------------------------ Collateralized mortgage obligations (average maturity of 2 years and 4 months): Within 1 year.................................................. 230,192 121 137 230,176 6.43 After 1 to 5 years............................................. 510,313 293 246 510,360 6.44 After 5 to 10 years............................................ 44,424 47 32 44,439 6.43 After 10 years................................................. 15,231 1 9 15,223 6.49 ------------------------------------------------------------ 800,160 462 424 800,198 6.44 ------------------------------------------------------------ Mortgage-backed securities (average maturity of 24 years and 8 months): Within 1 year................................................. 82,330 546 135 82,741 5.92 After 1 to 5 years............................................ 14,625 219 40 14,804 6.34 After 5 to 10 years........................................... 16,360 408 14 16,754 6.96 After 10 years................................................ 280,051 5,482 61 285,472 6.78 ------------------------------------------------------------ 393,366 6,655 250 399,771 6.59 ------------------------------------------------------------ Equity securities (without contractual maturity)................. 21,844 17,352 39,196 3.67 ------------------------------------------------------------ Other (average maturity of 11 years and 5 months): After 5 to 10 years........................................... 2,889 2 2,887 6.50 After 10 years................................................ 950 19 969 6.26 ------------------------------------------------------------ 3,839 19 2 3,856 6.44 ------------------------------------------------------------ $ 5,194,479 $47,656 $ 3,130 $5,239,005 6.23% ============================================================
F-49 70
1996 1995 ------------------------------------------------------------------- Weighted Amortized Unrealized Unrealized Market average Market costs gains losses value yield Value -------------------------------------------------------------------- (In thousands) U.S. Treasury securities (average maturity of 1 year and 3 months): Within 1 year........................................ $ 900,463 $ 2,325 $ 59 $ 902,729 5.88% $1,405,122 After 1 to 5 years................................... 1,335,189 5,492 1,905 1,338,776 6.00 1,048,959 -------------------------------------------------------------------- 2,235,652 7,817 1,964 2,241,505 5.96 2,454,081 -------------------------------------------------------------------- Obligations of other U.S. Government agencies and corporations (average maturity of 5 years and 8 months): Within 1 year...................................... 75,256 120 46 75,330 6.39 62,677 After 1 to 5 years................................. 73,064 197 460 72,801 5.77 233,146 After 5 to 10 years................................ 155,231 113 155,344 6.84 1,232 -------------------------------------------------------------------- 303,551 430 506 303,475 6.47 297,055 -------------------------------------------------------------------- Obligations of Puerto Rico, States and political sub- divisions (average maturity of 4 years and 6 months): Within 1 year...................................... 6,832 6 8 6,830 4.64 7,078 After 1 to 5 years................................. 14,510 198 76 14,632 5.12 16,305 After 5 to 10 years................................ 12,695 93 90 12,698 5.36 4,166 After 10 years..................................... 671 9 662 5.34 -------------------------------------------------------------------- 34,708 297 183 34,822 5.12 27,549 -------------------------------------------------------------------- Collateralized mortgage obligations (average maturity of 1 year and 10 months): Within 1 year...................................... 101,158 16 182 100,992 6.02 35,393 After 1 to 5 years................................. 304,987 37 645 304,379 6.11 74,518 After 5 to 10 years................................ 26,125 5 4 26,126 6.07 2,339 After 10 years..................................... 4,593 4,593 6.43 5,088 -------------------------------------------------------------------- 436,863 58 831 436,090 6.09 117,338 -------------------------------------------------------------------- Mortgage-backed securities (average maturity of 21 years and 7 months): Within 1 year..................................... 7,391 1 223 7,169 5.59 11,592 After 1 to 5 years................................ 43,695 21 1,017 42,699 5.75 49,845 After 5 to 10 years............................... 7,482 3 318 7,167 6.98 7,356 After 10 years.................................... 312,901 247 1,064 312,084 6.63 199,187 -------------------------------------------------------------------- 371,469 272 2,622 369,119 6.51 267,980 -------------------------------------------------------------------- Equity securities (without contractual maturity) 12,145 499 12,644 0.86 27,918 -------------------------------------------------------------------- Other (average maturity of 13 years and 2 months): Within 1 year..................................... 203 1 204 8.19 After 5 to 10 years............................... 10,103 2 10,105 8.24 10,000 After 10 years.................................... 8,050 80 7,970 6.90 8,053 -------------------------------------------------------------------- 18,356 3 80 18,279 7.65 18,053 -------------------------------------------------------------------- $3,412,744 $ 9,376 $ 6,186 $3,415,934 6.06% $3,209,974 ====================================================================
The weighted average yield on investment securities available-for-sale is based on amortized cost, therefore it does not give effect to changes in fair value. The aggregate amortized cost and approximate market value of investment securities available-for-sale at December 31, 1997, by contractual or estimated maturity, are shown below:
Amortized cost Market value -------------------------------- (In thousands) Within 1 year........................ $ 883,019 $ 884,223 After 1 to 5 years................... 3,585,268 3,606,219 After 5 to 10 years.................. 382,679 382,154 After 10 years....................... 321,669 327,213 -------------------------------- Total ..................... 5,172,635 5,199,809 Without contractual maturity......... 21,844 39,196 -------------------------------- Total investment securities available-for-sale................ $ 5,194,479 $5,239,005 ================================
F-50 71 Proceeds from the sale of investment securities available-for-sale during 1997 were $5,212,194,000 (1996 - $2,896,060,000; 1995 - $286,045,000). Gross realized gains and losses on those sales during the year were $6,266,000 and $3,998,000 respectively (1996 - $8,504,000 and $5,440,000; 1995 - $6,284,000 and $916,000). The basis on which cost was determined in computing the realized gains and losses was the specific identification method. NOTE 4 - INVESTMENT SECURITIES HELD-TO-MATURITY: The amortized cost, gross unrealized gains and losses, approximate market value (or fair value for certain investment securities where no market quotations are available), weighted average yield and maturities of investment securities held-to-maturity as of December 31, 1997 and 1996 (1995 - only amortized cost is presented) were as follows:
1997 -------------------------------------------------------- Weighted Amortized Unrealized Unrealized Market average cost gains losses value yield -------------------------------------------------------- (In thousands) Obligations of other U.S. Government agencies and corporations (average maturity of 2 months): Within 1 year ......................................... $ 156,422 $ 6 $ 100 $156,328 5.49% -------------------------------------------------------- Obligations of Puerto Rico, States and political subdivisions (average maturity of 6 years and 9 months): Within 1 year ........................................... 8,455 34 16 8,473 7.39 After 1 to 5 years ...................................... 17,726 199 6 17,919 7.36 After 5 to 10 years ..................................... 11,465 761 47 12,179 8.16 After 10 years .......................................... 15,280 199 15,479 8.93 -------------------------------------------------------- 52,926 1,193 69 54,050 7.99 -------------------------------------------------------- Collateralized mortgage obligations (average maturity of 1 year and 11 months): Within 1 year ........................................... 26,031 5 98 25,938 6.04 After 1 to 5 years ...................................... 34,956 69 80 34,945 6.57 After 5 to 10 years ..................................... 2,691 11 2 2,700 6.61 -------------------------------------------------------- 63,678 85 180 63,583 6.36 -------------------------------------------------------- Mortgage-backed securities (average maturity of 3 years and 7 months): Within 1 year ........................................... 8,586 69 87 8,568 7.44 After 1 to 5 years ...................................... 23,252 193 237 23,208 7.44 After 5 to 10 years ..................................... 12,635 112 127 12,620 7.43 After 10 years .......................................... 1,522 22 1,500 6.70 -------------------------------------------------------- 45,995 374 473 45,896 7.41 -------------------------------------------------------- Equity securities (without contractual maturity) ............................................... 70,771 70,771 5.23 -------------------------------------------------------- Other (average maturity of 6 years and 4 months): Within 1 year ........................................... 3,150 3,150 5.96 After 1 to 5 years ...................................... 5,645 4 5,649 2.34 After 5 to 10 years ..................................... 4,229 4,229 8.24 After 10 years .......................................... 6,177 35 6,142 8.01 -------------------------------------------------------- 19,201 4 35 19,170 6.06 -------------------------------------------------------- $ 408,993 $ 1,662 $ 857 $409,798 6.15% ========================================================
F-51 72
1996 1995 ------------------------------------------------------------------------ Weighted Amortized Unrealized Unrealized Market average Amortized cost gains losses value yield cost ------------------------------------------------------------------------ (In thousands) U.S. Treasury securities (average maturity of 6 months): Within 1 year..................................... $ 618,934 $ 590 $ 183 $ 619,341 5.83% $ 301,463 ------------------------------------------------------------------------ After 1 to 5 years................................ 623,703 ------------------------------------------------------------------------ 618,934 590 183 619,341 5.83 925,166 ------------------------------------------------------------------------ Obligations of other U.S. Government agencies and corporations (average maturity of 5 months): Within 1 year..................................... 119,701 107 119,594 6.17 After 1 to 5 years................................ 20,000 525 19,475 3.50 122,978 ------------------------------------------------------------------------ 139,701 632 139,069 5.78 122,978 ------------------------------------------------------------------------ Obligations of Puerto Rico, States and political subdivisions (average maturity of 2 years and 11 months): Within 1 year..................................... 98,073 52 56 98,069 3.32 125,983 After 1 to 5 years................................ 23,993 704 63 24,634 7.33 34,578 After 5 to 10 years............................... 11,839 624 12,463 8.14 12,179 After 10 years.................................... 17,397 447 17,844 8.95 22,455 ------------------------------------------------------------------------ 151,302 1,827 119 153,010 4.98 195,195 ------------------------------------------------------------------------ Collateralized mortgage obligations (average maturity of 1 year and 6 months): Within 1 year..................................... 93,077 37 522 92,592 5.43 150,960 After 1 to 5 years................................ 59,607 259 364 59,502 6.13 120,345 After 5 to 10 years............................... 4,582 15 8 4,589 6.24 14,058 After 10 years.................................... 109 ------------------------------------------------------------------------ 157,266 311 894 156,683 5.72 285,472 ------------------------------------------------------------------------ Mortgage-backed securities (average maturity of 4 years and 3 months): Within 1 year..................................... 9,181 1 37 9,145 7.53 11,694 After 1 to 5 years................................ 27,813 3 114 27,702 7.52 32,965 After 5 to 10 years............................... 16,004 2 71 15,935 7.51 17,877 After 10 years.................................... 2,730 74 2,656 7.17 4,111 ----------------------------------------------------------------------- 55,728 6 296 55,438 7.50 66,647 ----------------------------------------------------------------------- Equity securities (without contractual maturity) 61,407 61,407 6.06 43,558 ----------------------------------------------------------------------- Other (average maturity of 5 years and 9 months): Within 1 year.................................... 250 250 7.50 After 1 to 5 years............................... 6,145 5 6,150 2.78 6,145 After 5 to 10 years.............................. 4,197 4,197 7.82 4,027 After 10 years................................... 2,136 40 2,096 5.31 2,156 ------------------------------------------------------------------------ 12,728 5 40 12,693 4.97 12,328 ------------------------------------------------------------------------ $1,197,066 $ 2,739 $ 2,164 $ 1,197,641 5.78% $1,651,344 ========================================================================
The aggregate amortized cost and approximate market value of investment securities held-to-maturity at December 31, 1997, by contractual or estimated maturity, are shown below:
Amortized cost Market value --------------------------------- (In thousands) Within 1 year........................ $202,644 $202,457 After 1 to 5 years................... 81,579 81,721 After 5 to 10 years.................. 31,020 31,728 After 10 years....................... 22,979 23,121 ------------------------------- Total ..................... 338,222 339,027 Without contractual maturity......... 70,771 70,771 ------------------------------- Total investment securities held-to-maturity................... $408,993 $409,798 ================================
F-52 73 During 1996, investment securities held-to-maturity with an amortized cost of $2,622,000 were called by the issuer. Proceeds from the sale of those securities were $2,652,000. Gross realized gain on this transaction was $30,000. Investments in obligations that are payable from and secured by the same source of revenue or taxing authority, other than the U.S. government, and that exceeded 10 percent of stockholders' equity were as follows:
Percent of Amortized stockholders' Market cost equity value ------------------------------------ (Dollars in thousands) Issuer: Government of Puerto Rico, its agencies and instrumentalities: December 31, 1996................... $151,203 12% $152,933
NOTE 5 - PLEDGED ASSETS: At December 31, 1997, investment securities and loans amounting to $4,067,567,000 (1996 - $2,788,401,000; 1995 - $2,920,220,000) are pledged to secure public and trust deposits and securities and mortgages sold under agreements to repurchase. NOTE 6 - LOANS AND ALLOWANCE FOR LOAN LOSSES: The composition of the loan portfolio at December 31, was as follows:
1997 1996 ---------------------------- (In thousands) Loans secured by real estate: Insured or guaranteed by the U.S. Government or its agencies ........................................ $ 79,673 $ 83,864 Guaranteed by the Commonwealth of Puerto Rico ............ 63,035 67,497 Commercial loans secured by real estate .................. 1,109,213 1,030,383 Residential conventional mortgages ....................... 2,432,183 2,295,723 Construction and land development ........................ 190,509 181,433 Consumer ................................................. 605,204 536,527 ---------------------------- 4,479,817 4,195,427 Financial institutions .................................... 53,145 90,345 Commercial, industrial and agricultural ................... 3,245,706 2,390,267 Lease financing ........................................... 722,031 639,945 Consumer for household, credit cards and other consumer expenditures ............................ 2,700,661 2,344,001 Other ..................................................... 256,315 194,926 ---------------------------- $ 11,457,675 $ 9,854,911 ============================
As of December 31, 1997, loans on which the accrual of interest income had been discontinued amounted to $194,442,000 (1996 - $145,408,000; 1995 - $144,482,000). If these loans had been accruing interest, the additional interest income realized would have been approximately $11,868,000 (1996 - $7,696,000; 1995 - $7,135,000). In addition, there is $6,000 of renegotiated loans still accruing interest at December 31, 1997 (1996 - $3,308,000; 1995 - $2,742,000). Included in the non-accruing loans as of December 31, 1997 was $30,840,000 (1996 - $16,320,000; 1995 - $14,827,000) in consumer loans. F-53 74 At December 31, the recorded investment in loans that were considered impaired and the related disclosures are shown below:
December 31, --------------------------- 1997 1996 (In thousands) Impaired loans with a related allowance ........................... $ 82,338 $ 59,447 Impaired loans that do not require allowance ...................... 37,313 36,700 --------------------------- Total impaired loans ........................................ $ 119,651 $ 96,147 ============================ Allowance for impaired loans ...................................... $ 18,808 $ 17,777 ============================ Impaired loans measured based on fair value of collateral ......... $ 39,636 $ 36,700 Impaired loans measured based on discounted cash flows ............ 80,015 59,447 --------------------------- $ 119,651 $ 96,147 ============================ Average balance of impaired loans during the year ................. $ 113,208 $ 88,165 ============================ Interest income recognized on impaired loans during the year ...... $ 6,327 $ 3,526 ============================
The changes in the allowance for loan losses for the year ended December 31, were as follows:
1997 1996 1995 ---------------------------------------- (In thousands) Balance at beginning of year ................ $ 185,574 $ 168,393 $ 153,798 Reserves acquired ........................... 13,237 402 Provision for loan losses ................... 110,607 88,839 64,558 Recoveries .................................. 49,823 35,901 28,744 Loans charged-off ........................... (147,590) (107,961) (78,707) ---------------------------------------- Balance at end of year ...................... $ 211,651 $ 185,574 $ 168,393 ========================================
The components of the net financing leases receivable at December 31, were:
1997 1996 ------------------------------ (In thousands) Total minimum lease payments.................................... $564,981 $495,820 Estimated residual value of leased property .................... 154,034 141,561 Deferred origination costs .................................... 3,016 2,564 Less - Unearned financing income .......................... (140,104) (123,944) ------------------------------ Net minimum lease payments ..................................... 581,927 516,001 Less - Allowance for loan losses ........................ (5,869) (3,415) ------------------------------ $576,058 $512,586 ==============================
Estimated residual value is generally established at amounts expected to be sufficient to cover the Corporation's investment. At December 31, 1997, future minimum lease payments are expected to be received as follows:
(In thousands) -------------- 1998 ........................... $200,841 1999 ........................... 152,963 2000 ........................... 110,537 2001 ............................ 70,168 2002 and thereafter ............ 30,472 -------- $564,981 ========
F-54 75 NOTE 7 - Related party transactions: The Corporation grants loans to its directors, executive officers and to certain related individuals or organizations in the ordinary course of business. The movement and balance of these loans were as follows:
Officers Directors Total -------------------------------------- (In thousands) Balance at January 1, 1996..... $ 2,347 $ 144,348 $ 146,695 New loans...................... 839 184,384 185,223 Payments....................... (211) (200,345) (200,556) -------------------------------------- Balance at December 31, 1996... 2,975 128,387 131,362 New loans...................... 291 117,762 118,053 Payments....................... (661) (137,539) (138,200) -------------------------------------- Balance at December 31, 1997... $ 2,605 $ 108,610 $ 111,215 ======================================
These loans have been consummated on terms no more favorable than those that would have been obtained if the transaction had been with unrelated parties. NOTE 8 - PREMISES AND EQUIPMENT: Premises and equipment are stated at cost less accumulated depreciation and amortization as follows:
Useful life in years 1997 1996 ----------------------------------------- (In thousands) Land............................................... $ 51,286 $ 47,315 ------------------------- Buildings.......................................... 15-50 188,833 208,317 Equipment.......................................... 3-10 336,826 280,945 Leasehold improvements............................. Various 55,837 53,169 ------------------------- 581,496 542,431 Less - Accumulated depreciation and amortization... 297,244 252,393 ------------------------- 284,252 290,038 ------------------------- Construction in progress........................... 29,354 19,344 ------------------------- $364,892 $356,697 =========================
Depreciation and amortization of premises and equipment for the year was $54,523,000 (1996- $48,481,000; 1995 - $44,448,000) of which $10,341,000 (1996 - $9,943,000; 1995 - $9,261,000) was charged to occupancy expense and $44,182,000 (1996 - $38,538,000; 1995 - $35,187,000) was charged to equipment, communications and other operating expenses. Occupancy expense is net of rental income of $16,442,000 (1996 - $16,193,000; 1995 - $15,384,000). In accordance with SFAS 121, during 1997, the Corporation recorded an impairment loss on a building, which was sold later in the year, of approximately $3,295,000 (1996- $700,000), based on an appraisal value, which was included in other operating income. F-55 76 NOTE 9- DEPOSITS: Total interest bearing deposits as of December 31, consisted of:
1997 1996 --------------------------- (In thousands) Savings deposits: Savings accounts ......................................... $ 3,584,963 $ 3,201,367 NOW and money market accounts ............................ 1,357,519 1,173,496 --------------------------- 4,942,482 4,374,863 --------------------------- Certificates of deposit: Under $100,000 ........................................... 2,246,988 1,884,135 $100,000 and over ........................................ 2,013,280 2,173,573 --------------------------- 4,260,268 4,057,708 --------------------------- $ 9,202,750 $ 8,432,571 ===========================
NOTE 10 - FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE: The following table summarizes certain information on federal funds purchased and securities sold under agreements to repurchase as of December 31:
1997 1996 1995 ---------------------------------------- (Dollars in thousands) Federal funds purchased .......................... $ 389,040 $ 158,336 $ 307,506 Securities sold under agreements to repurchase ... 2,334,289 1,717,129 2,693,372 ---------------------------------------- Total amount outstanding ......................... $2,723,329 $1,875,465 $3,000,878 ======================================== Maximum aggregate balance outstanding at any month-end ................................ $3,897,110 $2,922,611 $3,000,878 ======================================== Average daily aggregate balance outstanding ...... $2,836,290 $2,521,929 $2,016,273 ======================================== Weighted average interest rate: For the year ................... 5.01% 5.12% 5.43% At December 31.................. 5.51 5.16 5.61
F-56 77 NOTE 11 - OTHER SHORT-TERM BORROWINGS: Other short-term borrowings as of December 31, consisted of:
1997 1996 ------------------------ (In thousands) Advances under revolving lines of credit amounting to $605,000,000 (1996 - $240,000,000) with fixed interest rates ranging from 5.95% to 6.75% at December 31, 1997 (1996 - 5.55% to 6.88%) .......................................................................... $ 81,700 $ 65,000 Commercial paper with various maturities until June 1998 at rates ranging from 5.70% to 5.99% (1996 - 5.05% to 5.75%) .................................................................... 183,999 290,091 Term notes maturing in 1998, paying interest monthly at LIBOR less 3 basis points with a quarterly reset of interest rate ........................................................................... 25,000 Term notes maturing in 1998, paying interest quarterly at floating interest rates ranging from 0.25% to 0.75% (1996 - 0.25% to 0.50%) over 3-month LIBOR rate (LIBOR rate at December 31, 1997 was 5.81%; 1996 - 5.56%) ......................................................................... 66,488 189,961 Term notes maturing in 1998, paying interest semiannually at rates ranging from 5.40% to 8.12% (1996 - 5.33% to 8.32%) ........................................................... 111,509 136,952 Term funds purchased with maturities until July 1998 at rates ranging from 5.64% to 5.93% (1996 - 5.29% to 5.79%) .......................................................................... 680,000 652,000 Term notes with maturities until December 1998 with fixed rates ranging from 4.40% to 5.87% ........ 138,500 Term notes maturing in 1997, paying interest quarterly at floating interest rates of 0.125% over the 6-month LIBOR rate (LIBOR rate at December 31, 1996 was 5.60%) ................................... 10,000 Securities sold not yet purchased .................................................................. 59,315 Others ............................................................................................. 239 687 ------------------------ $1,287,435 $1,404,006 ========================
The weighted average interest rate of other short-term borrowings at December 31, 1997 was 5.60% (1996 - 5.75%; 1995 - 5.53%). The maximum aggregate balance outstanding at any month-end was approximately $1,985,452,000 (1996 - $1,404,006,000; 1995 - $773,366,000). The average aggregate balance outstanding during the year was approximately $1,609,035,000 (1996 - $883,739,000; 1995 - $529,111,000). The weighted average interest rate during the year was 5.94% (1996 - 6.27%; 1995 - 6.05%). F-57 78 NOTE 12 - NOTES PAYABLE: Notes payable outstanding at December 31, consisted of the following:
1997 1996 ------------------------ (In thousands) Term notes with maturities ranging from 1999 through 2005 paying interest semiannually at fixed rates ranging from 5.50% to 8.41% (1996 - 5.40% to 8.41%) .................................... $904,884 $575,360 Term notes with maturities ranging from 1999 through 2005 paying interest quarterly at rates ranging from 0.10% to 0.46% (1996 - 0.125% to 0.75%) over the 3-month LIBOR rate and 3-month US Treasury Bill rate (LIBOR and US Treasury Bill rates at December 31, 1997 were 5.81% and 5.35%, respectively; 1996 - 5.56% and 5.17%, respectively) .......................................... 194,366 117,356 Term notes maturing in 1999 paying interest monthly at a fixed rate of 5.92% ....................................................... 25,000 25,000 Promissory notes with maturities ranging from 1999 through 2003 with fixed interest rates ranging from 5.50% to 6.35% (1996 - 4.62% to 6.35%) ......................................... 49,200 43,700 Promissory notes with maturities ranging from 2000 through 2005 with floating interest rates ranging from 87% to 92% of the 3-month LIBID rate (LIBID rate at December 31, 1997 was 5.69%; 1996 - 5.44%) ....................................................... 230,000 200,000 Term notes maturing in 1998 paying interest monthly at LIBOR less 3 basis points with a quarterly reset of the interest rate .............................................................. 25,000 Mortgage notes and other debt with fixed rates and terms ......................... 246 297 ------------------------ $1,403,696 $986,713 ========================
NOTE 13 - SENIOR DEBENTURES: Senior debentures at December 31, 1996, consisted of a $30,000,000 obligation issued by the Corporation with interest at a fixed rate of 8.25%, which matured in January 1997. The senior debentures contained various covenants which, among others, restricted the payment of dividends. These debentures prohibited the Corporation from paying dividends or making any other distributions with respect to the Corporation's common stock if such aggregate distribution exceeded $50,000,000 plus 50% of consolidated net income (or minus 100% of consolidated net loss), computed on a cumulative basis from January 1, 1992 to the date of payment of any such dividends or other distributions or if an event of default had occurred. NOTE 14 - SUBORDINATED NOTES: Subordinated notes at December 31, 1997 and 1996, consisted of $125,000,000 notes issued by the Corporation on December 12, 1995, maturing on December 15, 2005, with interest payable semiannually at 6.75%. The notes issued by the Corporation are unsecured obligations which are subordinated in right of payment to the prior payment in full of all present and future senior indebtedness of the Corporation. These notes do not provide for any sinking fund. NOTE 15 - PREFERRED BENEFICIAL INTEREST IN POPULAR NORTH AMERICA'S JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES GUARANTEED BY THE CORPORATION: On February 5, 1997, BanPonce Trust I, a statutory business trust created under the laws of the State of Delaware that is wholly-owned by Popular North America and indirectly wholly-owned by the Corporation, sold to institutional investors $150,000,000 of its 8.327% Capital Securities Series A (liquidation amount $1,000 per Capital Security) through certain underwriters. The proceeds of the issuance, together with the proceeds of the purchase by Popular North America of $4,640,000 of its 8.327% common securities (liquidation amount $1,000 per common security) were used to purchase $154,640,000 aggregate principal amount of Popular North America's 8.327% Junior Subordinated Deferrable Interest Debentures, Series A (the "Junior F-58 79 - -------------------------------------------------------------------------------- Subordinated Debentures"). These capital securities qualify as Tier I capital, are fully and unconditionally guaranteed by the Corporation, and are presented in the Consolidated Statements of Condition as "Guaranteed Preferred Beneficial Interest in Popular North America's Subordinated Debentures." The obligations of Popular North America under the Junior Subordinated Debentures and its guarantees of the obligations of BanPonce Trust I are fully and unconditionally guaranteed by the Corporation. The assets of BanPonce Trust I consisted of $154,640,000 of Junior Subordinated Debentures and a related accrued interest receivable of $4,292,000. The Junior Subordinated Debentures mature on February 1, 2027; however, under certain circumstances, the maturity of the Junior Subordinated Debentures (which shortening would result in a mandatory redemption of the Capital Securities) may be shortened. NOTE 16 - LONG-TERM DEBT MATURITY REQUIREMENTS: The aggregate amounts of maturities of notes payable, capital securities and subordinated notes were as follows:
Notes Capital Subordinated Year payable Securities notes Total ------------------------------------------------------------------------------------- (In thousands) 1998.................... $ 30 $ 30 1999.................... 355,385 355,385 2000.................... 432,342 432,342 2001.................... 203,973 203,973 2002.................... 184,043 184,043 Later years............. 227,923 $150,000 $125,000 502,923 --------------------------------------------------------- Total................... $1,403,696 $150,000 $125,000 $1,678,696 =========================================================
NOTE 17 - PREFERRED STOCK OF BPPR: BPPR has 200,000 shares of authorized preferred stock with a par value of $100. This stock may be issued in series, and the shares of each series shall have such rights and preferences as shall be fixed by the Board of Directors when authorizing the issuance of that particular series. At December 31, 1997, there are no such shares issued or outstanding. NOTE 18 - STOCKHOLDERS' EQUITY: The Corporation has 180,000,000 shares of authorized common stock with par value of $6 per share. At December 31, 1997, there were 67,682,704 (1996 - 66,088,506) shares issued and outstanding. On May 8, 1997, the Board of Directors of the Corporation approved a stock repurchase program which allows the Corporation to repurchase in the open market, at such times and prices as market conditions shall warrant, up to three million shares of its outstanding common stock. As of December 31, 1997, the Corporation had purchased 988,800 shares under this program for a total cost of $39,559,000. On April 26, 1996, the Corporation's Board of Directors authorized a stock split of one share of stock for each share outstanding effected in the form of a dividend, effective July 1, 1996. As a result of the split, 33,000,590 shares were issued and $198,004,000 was transferred from retained earnings to common stock. All per share data included herein have been adjusted to reflect the stock split. The Corporation has a dividend reinvestment plan under which stockholders may reinvest their quarterly dividends in shares of common stock at a 5% discount from the market price at the time of issuance. During 1997, shares totaling 120,726 (1996 - 191,236; 1995 - 221,016), equivalent to $4,642,000 (1996 - $4,135,000; 1995 - $3,500,000) in additional equity, were issued under the plan. The Corporation has 10,000,000 shares of authorized preferred stock with no par value. This stock may be issued in one or more series, and the shares of each series shall have such rights and preferences as shall be fixed by the Board of Directors when authorizing the issuance of that particular series. The Corporation has 4,000,000 shares issued and outstanding of Series A preferred stock. These shares are non-convertible and are redeemable at the option of the Corporation on or after June 30, 1998. The redemption price per share is $26.25 from June 30, 1998 through June 29, 1999, $26.00 from June 30, 1999 through June 29, 2000, $25.75 from June 30, 2000 through June 29, 2001, $25.50 from June 30, 2001 through June 29, 2002 and $25.00 from June 30, 2002 and thereafter. Dividends on the Series A preferred stock are non-cumulative and are payable monthly at the annual rate of 8.35% of the liquidation preference of $25.00 per share. F-59 80 The Corporation's average number of common shares outstanding used in the computation of net income per common share was 67,018,482 (1996 - 66,022,312; 1995 - 65,816,300). During the year, cash dividends of $0.80 (1996 - $0.69 and 1995 - $0.58) per common share outstanding amounting to $53,681,000 (1996 - $45,557,000; 1995 - $37,846,000) were declared. In addition, dividends declared on preferred stock amounted to $8,350,000 (1996 - $8,350,000; 1995 - $8,350,000). Popular International Bank, Inc. and Popular North America, Inc.'s bank subsidiaries (Banco Popular, Illinois, Banco Popular, N.A. (California), Banco Popular, N.A. (Florida), Banco Popular, N.A. (Texas) and Banco Popular, FSB) have certain statutory provisions and regulatory requirements and policies, such as the maintenance of adequate capital, that limit the amount of dividends they can pay. Other than these limitations, no other restrictions exist on the ability of Popular International Bank, Inc. and Popular North America, Inc. to make dividend and asset distributions to the Corporation, nor on the ability of the subsidiaries of Popular North America, Inc., except for Banco Popular, FSB, to make distributions to Popular North America, Inc. In connection with the acquisition by Banco Popular, FSB from the Resolution Trust Company (RTC) of four New Jersey branches of the former Carteret Federal Savings Bank, the RTC provided to Banco Popular, FSB interim financial assistance in the form of a loan in the amount of $20 million, which matures on January 20, 2000, but which is prepayable any time before then. Pursuant to the terms of such financing, Banco Popular, FSB may not, among other things, declare or pay any dividends on its outstanding capital stock (unless such dividends are used exclusively for payment of principal of or interest on such RTC loan) or make any distribution of its assets until payment in full of such promissory note. NOTE 19 - REGULATORY CAPITAL REQUIREMENTS: The Corporation is subject to various regulatory capital requirements imposed by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Corporation's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation must meet specific capital guidelines that involve quantitative measures of the Corporation's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory requirements. The Corporation's capital amounts and classification are also subject to qualitative judgements by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Corporation to maintain minimum amounts and ratios of Tier I and total capital to risk-weighted assets, and of Tier I capital to average assets (leverage ratio) as defined in the regulations. Management has determined that as of December 31, 1997, the Corporation exceeded all capital adequacy requirements to which it is subject. As of December 31, 1997, the Corporation was well capitalized under the regulatory framework for prompt corrective action and there are no conditions or events since that date that management believes have changed the institution's category. The Corporation's actual and required ratios and amounts of total risk-based capital, Tier I risk-based capital and Tier I leverage, as of December 31, were as follows: F-60 81
Regulatory requirements ------------------------------------------ To be well capitalized under prompt For capital corrective action Actual adequacy purposes provisions ---------------------------------------------------------------- Amount Ratio Amount Ratio Amount Ratio ---------------------------------------------------------------- As of December 31, 1997: (In thousands) Total Capital (to Risk-Weighted Assets): Consolidated .......................... $1,598,506 14.56% $878,054 8% $1,097,567 10% BPPR .................................. 1,165,509 12.58 741,226 8 926,533 10 Banco Popular, FSB .................... 131,722 15.11 69,745 8 87,181 10 Tier I Capital (to Risk-Weighted Assets): Consolidated .......................... $1,335,391 12.17% $439,027 4% $ 658,540 6% BPPR .................................. 1,048,899 11.32 370,613 4 555,920 6 Banco Popular, FSB .................... 120,697 13.84 34,872 4 52,309 6 Tier I Capital (to Average Assets): Consolidated .......................... $1,335,391 6.86% $583,831 3% $ 973,052 5% BPPR .................................. 1,048,899 6.36 494,917 3 824,862 5 Banco Popular, FSB .................... 120,697 8.02 45,134 3 75,224 5 Regulatory requirements ------------------------------------------ To be well capitalized under prompt For capital corrective action Actual adequacy purposes provisions ---------------------------------------------------------------- Amount Ratio Amount Ratio Amount Ratio ---------------------------------------------------------------- As of December 31, 1996: (In thousands) Total Capital (to Risk-Weighted Assets): Consolidated .......................... $1,367,478 14.18% $771,505 8% $ 964,382 10% BPPR .................................. 1,017,755 12.57 647,624 8 809,530 10 Banco Popular, FSB .................... 117,989 16.14 58,480 8 73,100 10 Tier I Capital (to Risk-Weighted Assets): Consolidated .......................... $1,121,128 11.63% $385,753 4% $ 578,629 6% BPPR .................................. 915,825 11.31 323,812 4 485,718 6 Banco Popular, FSB .................... 108,751 14.88 29,240 4 43,860 6 Tier I Capital (to Average Assets): Consolidated .......................... $1,121,128 6.71% $501,357 3% $ 835,595 5% BPPR .................................. 915,825 6.65 412,944 3 688,239 5 Banco Popular, FSB .................... 108,751 8.99 36,300 3 60,500 5
F-61 82 NOTE 20 - INTEREST ON INVESTMENTS: Interest on investments consisted of the following:
1997 1996 1995 ------------------------------------ (In thousands) Money market investments: Federal funds sold and securities and mortgages purchased under agreements to resell ..... $ 31,886 $ 45,697 $ 22,823 Time deposits with other banks ........................... 1,799 776 165 Other .................................................... 238 224 89 ------------------------------------ $ 33,923 $ 46,697 $ 23,077 ==================================== Investment securities: U.S. Treasury securities ................................. $ 213,153 $ 189,300 $ 167,657 Obligations of other U.S. Government agencies and corporations ............. 82,205 43,157 35,697 Obligations of Puerto Rico, States and political subdivisions ..................... 8,755 10,902 12,948 Collateralized mortgage obligations ...................... 37,786 26,265 26,435 Mortgage-backed securities ............................... 10,667 6,456 10,892 Other .................................................... 6,170 4,530 6,312 ------------------------------------ $ 358,736 $ 280,610 $ 259,941 ====================================
Interest income on investment securities for the year ended December 31, 1997, includes tax exempt interest of $290,638,000 (1996 - $229,958,000; 1995 - $202,209,000). Exempt interest relates mostly to obligations of the United States and Puerto Rico governments. NOTE 21 - EMPLOYEE BENEFITS: Pension plan: All regular employees of BPPR are covered by a non-contributory defined benefit pension plan. Pension benefits begin to vest after five years of service and are based on age, years of credited service and final average compensation, as defined. At December 31, 1997, plan assets consisted primarily of U.S. Government obligations, high grade corporate bonds and listed stocks, including 2,836,430 shares (1996 - 2,836,430) of the Corporation with a market value of approximately $140,403,000 (1996 - $95,730,000). Dividends paid on shares of the Corporation held by the plan during 1997 amounted to $2,156,000 (1996 - $1,957,000). The following table sets forth the plan's funded status and amounts recognized in the consolidated financial statements at December 31:
1997 1996 --------------------- (In thousands) Actuarial present value of benefit obligations: Vested benefits ......................................... $(204,046) $(172,272) Non-vested benefits ..................................... (42,545) (38,117) --------------------- Accumulated benefit obligation ............................. (246,591) (210,389) Effect of projected future compensation levels ............. (44,467) (32,773) --------------------- Projected benefit obligation ............................... (291,058) (243,162) Plan assets at fair market value ........................... 368,399 293,362 --------------------- Plan assets in excess of projected benefit obligation ...................................... 77,341 50,200 Unrecognized net gain from past experience different from that assumed and effect of changes in assumptions .................... (57,833) (27,101) Unrecognized prior service cost ............................ (2,374) (2,620) Unrecognized initial net assets ............................ (18,086) (20,547) --------------------- Accrued pension cost ....................................... $ (952) $ (68) =====================
F-62 83 Net pension cost for the year ended December 31, included the following components:
1997 1996 1995 ------------------------------------ (In thousands) Service costs - benefits earned during the period ... $ 10,847 $ 9,860 $ 6,791 Interest cost on projected benefit obligation ...... 18,657 16,645 14,798 Actual return on plan assets ........................ (87,267) (68,965) (48,665) Net amortization and deferral ....................... 58,647 46,273 29,257 ------------------------------------ Net pension costs ............................... 884 3,813 2,181 Cost of early retirement window ..................... 3,851 ------------------------------------ Total pension cost .............................. $ 884 $ 3,813 $ 6,032 ====================================
At December 31, 1997, the discount rate used in determining the actuarial present value of the projected benefit obligation was 7.00% (1996 - 7.50%; 1995 - - 7.25%). Rates of future compensation levels reflected a 4% inflation assumption plus a merit component ranging from 0.5% to 4.5% for 1997, 1996 and 1995. The expected long-term rate of return on assets used in the computation was 9% for 1997, 1996 and 1995. In 1995, BPPR implemented a voluntary early retirement plan ("window") for employees meeting certain eligibility requirements. The plan was available from January 1, 1995 until May 1, 1995, and had a total cost of $4,539,000, including pension and postretirement benefit costs. Retirement and savings plan: The Corporation also provides contributory retirement and savings plans pursuant to sections 1165(e) of the Puerto Rico Internal Revenue Code and section 401(k) of the Internal U.S. Revenue Code, as applicable, for substantially all the employees of Popular Securities, Equity One, Banco Popular FSB, Banco Popular N.A. (California), Banco Popular Illinois, Popular Finance, Popular Leasing and Popular Mortgage. Employer contributions are determined based on specific provisions of each plan. The cost of providing this benefit in 1997 was $2,811,000 (1996 - $2,163,000; 1995 - $1,247,000). The Corporation also has a contributory savings plan available to employees of BPPR. Employees are fully vested in the employer's contribution after seven years of service. All contributions are invested in shares of the Corporation. Total savings plan expense was $999,000 in 1997 (1996 - $863,000; 1995 - $621,000). The savings plan held 553,293 (1996 - 368,117; 1995 - 140,970) shares of common stock of the Corporation with a market value of approximately $27,388,000 at December 31, 1997 (1996 - $12,424,000; 1995 - $2,731,000). Postretirement health care benefits: In addition to providing pension benefits, BPPR provides certain health care benefits for retired employees. Substantially all of the employees of BPPR who are eligible to retire under the pension plan, and provided they reach retirement age while working for BPPR, may become eligible for these benefits. The actual disbursement for providing these benefits during 1997 amounted to approximately $2,703,000 (1996 - $2,556,000; 1995 - $2,152,000). The components of net postretirement benefit cost for the year ended December 31, were as follows:
1997 1996 1995 ------------------------------------ (In thousands) Service cost-benefits attributable to service during the period ............................... $ 3,852 $ 3,584 $ 2,658 Interest cost on accumulated postretirement benefit obligation ............................. 5,556 5,719 5,435 Net amortization and deferral ....................... 435 1,230 597 ------------------------------------ Net postretirement benefit cost ................. 9,843 10,533 8,690 Cost of early retirement window ..................... 688 Total postretirement benefit cost ............... $ 9,843 $ 10,533 $ 9,378 ====================================
F-63 84 The status of the Corporation's unfunded postretirement benefit plan at December 31, was as follows:
1997 1996 --------------------- (In thousands) Actuarial present value of expected postretirement benefit obligation: Retirees ................................................... $(27,225) $(26,929) Fully eligible active plan participants .................... (14,318) (12,569) Other active plan participants ............................. (46,433) (44,470) --------------------- Accumulated postretirement benefit obligation .............. (87,976) (83,968) Unrecognized net loss from past experience different from that assumed and effects of changes in assumptions .................................. 12,284 14,981 Unrecognized prior service cost ............................ 4,941 5,376 --------------------- Accrued postretirement benefit cost ........................ $(70,751) $(63,611) =====================
The weighted average discount rate used in determining the accumulated postretirement benefit obligation at December 31, 1997 was 7.00% (1996 - 7.50%). The assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation at December 31, 1996 was 10%, gradually decreasing to 5% by the year 2001 and remaining at that level thereafter. A one-percentage point increase in the health care cost trend rate would increase the accumulated postretirement benefit obligation as of December 31, 1997, by $14,200,000 and the sum of the service and interest cost in 1997 by $1,782,000. Profit sharing plan: BPPR also has a profit sharing plan covering substantially all regular employees. Annual contributions are determined based on the bank's profitability ratios, as defined in the plan, and are deposited in trust. Profit sharing expense for the year, including the cash portion paid annually to employees which represented 40% of the expense for 1997, 1996 and 1995, amounted to $25,954,000 (1996 - $22,859,000; 1995 - $19,577,000). Long-term incentive plan: BPPR has a long-term incentive plan for its senior management. Under this plan, each January 1st the Board of Directors awards senior management a specified number of shares of common stock of the Corporation contingent upon reaching some pre-defined performance measures over periods of three years. The dividends attributable to these shares are also part of the award. The final number of shares awarded is subject to a factor based on the level of attainment. BPPR applied APB Opinion 25 and related Interpretations in accounting for the plans in 1995. Accordingly, compensation expense was recognized based on the prevailing stock price until measurement date. The measurement date is the date when the ultimate number of shares to be granted is known. Under the provisions of SFAS 123, effective in 1996, compensation cost is determined based on the fair value of the stock at the grant date. The compensation expense related to each award is recognized when probable, based on the best estimate of the outcome of the performance condition, on a straight line basis over the vesting period. The compensation cost recognized for the performance-based plan was $1,493,000 in 1997 (1996 - $837,000; 1995 - $284,000). Puerto Rico benefit restoration plan: BPPR also has a non-qualified unfunded supplementary pension and profit sharing plan for those employees whose compensation exceeds the limits established by ERISA. F-64 85 The following table sets forth the amounts recognized in the consolidated financial statements at December 31, for the benefit restoration plan:
1997 1996 ----------------------------- (In thousands) Actuarial present value of benefit obligations: Vested benefits ......................................... $ (490) $ (324) ----------------------------- Accumulated benefit obligation .......................... (490) (324) Effect of projected future compensation levels ............ (3,399) (1,849) ----------------------------- Projected benefit obligation ............................ (3,889) (2,173) Unrecognized net loss from past experience different from that assumed and effect of changes in assumptions .................... 1,847 847 Unrecognized prior service cost ........................... 571 624 ----------------------------- Accrued supplementary pension cost ........................ $ (1,471) $ (702) =============================
Net supplementary pension cost for the year ended December 31, included the following components:
1997 1996 1995 -------------------------- (In thousands) Service costs - benefits earned during the period .............................. $ 360 $ 172 $ 109 Interest cost on projected benefit obligation ..................................... 226 94 69 Net amortization and deferral .................... 183 64 53 -------------------------- Net supplementary pension cost ................... $ 769 $ 330 $ 231 ==========================
NOTE 22 - RENTAL EXPENSE AND COMMITMENTS: At December 31, 1997, the Corporation was obligated under a number of non-cancelable leases for land, buildings, and equipment which require rentals (net of related sublease rentals) as follows:
Minimum Sublease Year payments rentals Net ----------------------------------------------------------- (In thousands) 1998 .......... $ 17,022 $ 549 $ 16,473 1999 .......... 15,086 256 14,830 2000 .......... 13,387 180 13,207 2001 .......... 10,943 150 10,793 2002 .......... 8,375 93 8,282 Later years ... 61,216 4 61,212 ----------------------------------------------------------- $ 126,029 $ 1,232 $ 124,797 ===========================================================
Total rental expense for the year ended December 31, 1997, was $23,336,000 (1996 - $21,196,000; 1995 - $18,037,000). F-65 86 NOTE 23 - INCOME TAX: The components of income tax expense for the years ended December 31, are summarized below. Included in these amounts are income taxes of $747,000 in 1997 (1996 - $1,480,000; 1995 - $1,981,000), related to gains on securities transactions.
1997 1996 1995 ---------------------------------------- (In thousands) Current income tax expense: Puerto Rico ................................. $ 83,120 $ 81,488 $ 58,067 Federal and States .......................... 16,058 15,777 9,624 ---------------------------------------- Subtotal ................................. 99,178 97,265 67,691 ---------------------------------------- Deferred income tax expense (benefit): Puerto Rico ................................. (19,851) (23,589) (9,501) Federal and States .......................... (4,866) (2,799) 1,006 Adjustment for enacted changes in income tax laws ........................ 573 ---------------------------------------- Subtotal ................................. (24,717) (26,388) (7,922) ---------------------------------------- Total income tax expense ................. $ 74,461 $ 70,877 $ 59,769 ========================================
The reasons for the difference between the income tax expense applicable to income before provision for income taxes and the amount computed by applying the statutory rate in Puerto Rico, were as follows:
1997 1996 1995 ---------------------------------------------------------------- % of % of %of pre-tax pre-tax pre-tax Amount Income Amount Income Amount Income ---------------------------------------------------------------- (Dollars in thousands) Computed income tax at statutory rate................... $ 110,770 39% $ 99,851 39% $ 86,574 42% Benefits of net tax exempt interest income.................. (37,860) (13) (29,118) (11) (24,604) (12) Federal and States taxes and 1,551 144 (2,201) (1) other............................ ---------------------------------------------------------------- Income tax expense................ $ 74,461 26% $ 70,877 28% $ 59,769 29% ================================================================
In October 1994, a Tax Reform Act was enacted in Puerto Rico. In general terms, the Tax Reform was effective for taxable years beginning after June 30, 1995. Among its provisions, the Act reduced the maximum tax rate for corporations from 42% to 39%. The deferred taxes of the Corporation were adjusted accordingly in 1995, to reflect this tax rate reduction on those temporary differences and tax attributes that were expected to reverse or settle on or after January 1, 1996. The Act also repealed the reserve method of determining losses on loans and requires taxpayers to use the direct charge-off method and recapture the reserve balance at December 31, 1995 into income for tax purposes over a four-year period. As a result of this change, the Corporation is required to pay $15,247,000 in both, 1998 and 1999. In 1996 and 1997, the Corporation paid $14,763,000 and $14,994,000, respectively, related to the aforementioned recapture (the increase since 1997 results from the acquisition of RCB on June 30, 1997). A deferred tax asset is recorded to recognize the difference between the tax and accounting bases of the allowance for loan losses. F-66 87 Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Corporation's deferred tax assets and liabilities at December 31, were as follows:
1997 1996 ---------------------------- (In thousands) Deferred tax assets: Alternative minimum tax credits available for carryforward and other credits .......................... $ 22,353 $ 24,303 Net operating loss carryforward available .................... 1,340 292 Postretirement benefit obligation (other than pensions) ...................................... 28,069 24,966 Allowance for loan losses .................................... 50,203 18,670 Other temporary differences .................................. 16,398 22,339 ---------------------------- Total gross deferred tax assets ........................... 118,363 90,570 ---------------------------- Deferred tax liabilities: Differences between the assigned values and the tax bases of assets and liabilities recognized in purchase business combinations ....................... 11,893 16,025 Unrealized gain on securities available-for-sale ............. 11,180 1,490 Other temporary differences .................................. 11,819 8,325 ---------------------------- Total gross deferred tax liabilities ...................... 34,892 25,840 ---------------------------- Valuation allowance .......................................... 205 577 ---------------------------- Net deferred tax asset .................................... $ 83,266 $ 64,153 ============================
At December 31, 1997, the Corporation had $22,353,000 in credits expiring in annual installments through year 2014 that will reduce the regular income tax liability in future years. During 1997, the Corporation used alternative minimum tax (AMT) credits totaling $1,432,000 (1996 - $1,720,000) to reduce its regular tax liability. The Corporation had, at the end of 1997, $3,391,000 in net operating losses (NOL) available to carry over to offset taxable income in future years. These NOLs are available to carryforward until year 2004. During 1997, the Corporation used NOL carryforwards amounting to $748,000 to reduce its regular taxable income. Other temporary differences included as deferred assets are mainly related to the deferral of loan origination costs and commissions. A valuation allowance of $205,000 (1996 - $577,000) is reflected in 1997, related to deferred tax assets arising from NOL carryforwards and temporary differences for which the Corporation could not determine the likelihood of its realizability. Based on the information available, the Corporation expects to fully realize all other items comprising the net deferred tax as of December 31, 1997. Under the Puerto Rico Internal Revenue Code, the Corporation and its subsidiaries are treated as separate taxable entities and are not entitled to file consolidated tax returns. Until December 31, 1995, dividends received by the Corporation from its subsidiaries (net of an 85% dividend received deduction allowed by the former Puerto Rico Income Tax Law) were subject to Puerto Rico income tax at the normal corporate tax rates. Technical amendments to the Puerto Rico Internal Revenue Code increased the dividend received deduction to 100%, on dividends received from "controlled" subsidiaries, effective on January 1, 1996. In previous years, the Corporation did not recognize a deferred tax liability on the unremitted earnings of domestic subsidiaries since the Puerto Rico Income Tax Law provided certain alternatives to remit those earnings to the Corporation on a tax-free basis. The Corporation has never received any dividend payments from its U.S. subsidiaries. Any such dividend paid from a U.S. subsidiary to the Corporation would be subject to a 30% withholding tax based on the provisions of the U.S. Internal Revenue Code. The Corporation has not recorded any deferred tax liability on the unremitted earnings of its U.S. subsidiaries, based on the provisions of SFAS 109, which states that no recognition of a deferred tax liability is warranted for foreign subsidiaries if the indefinite reversal criteria applies. The Corporation believes that the likelihood of receiving dividend payments from any of its U.S. subsidiaries is remote, based on the significant expansions it is undertaking in the U.S. mainland. F-67 88 The Corporation's subsidiaries in the United States file a consolidated federal income tax return. The Corporation's federal income tax provision for 1997 was $9,583,000 (1996 - $12,281,000; 1995 - $9,265,000). The intercompany settlements of taxes paid is based on tax sharing agreements which generally allocates taxes to each entity based on a separate return basis. NOTE 24 - OFF-BALANCE SHEET LENDING ACTIVITIES AND CONCENTRATION OF CREDIT RISK: Off-balance sheet risk: The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of its customers and to manage its own risk arising from movements in interest rates. These financial instruments include loan commitments, letters of credit, standby letters of credit, futures contracts, options on futures contracts, interest rate swaps and caps and foreign exchange contracts. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated statement of condition. The contract or notional amount of these instruments, which are not included in the statement of condition, are an indicator of the Corporation's activities in particular classes of financial instruments. The Corporation's exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit, standby letters of credit and financial guarantees written is represented by the contractual notional amounts of those instruments. The Corporation uses the same credit policies in making these commitments and conditional obligations as it does for those reflected on the statement of condition. Financial instruments with off-balance sheet risk at December 31, whose contract amounts represent potential credit risk were as follows:
1997 1996 ------------------------------- (In thousands) Commitments to extend credit: Credit card lines....................................... $ 964,484 $ 915,589 Commercial lines of credit.............................. 1,668,221 1,374,670 Other unused commitments................................ 33,418 48,693 Commercial letters of credit.............................. 16,352 21,921 Standby letters of credit................................. 56,244 115,681 Commitments to purchase mortgage loans ................... 25,000 2,203
Commitments to extend credit: Contractual commitments to extend credit are legally binding agreements to lend money to customers at predetermined interest rates for a specified period of time. To extend credit the Corporation evaluates each customer's creditworthiness. The amount of collateral obtained, if deemed necessary, is based on management's credit evaluation of the counterparty. Collateral held varies but may include cash, accounts receivable, inventory, property, plant and equipment and investment securities, among others. The Corporation's exposure to credit loss in the event of nonperformance by the customer is represented by the contractual amount of the commitment to extend credit. Since many of the loan commitments may expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. Letters of credit: There are two principal types of letters of credit: commercial and standby letters of credit. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. In most instances, cash items are held by the Corporation to collateralize these instruments. In general, commercial letters of credit are short-term instruments used to finance a commercial contract for the shipment of goods from a seller to a buyer. This type of letter of credit ensures prompt payment to the seller in accordance with the terms of the contract. Although the commercial letter of credit is contingent upon the satisfaction of specified conditions, it represents a credit exposure if the buyer defaults on the underlying transaction. Standby letters of credit are also issued by the Corporation to disburse funds to a third party beneficiary if the Corporation's customer fails to perform under the terms of an agreement with the beneficiary. These letters of credit are used by the customer as a credit enhancement and typically expire without being drawn upon. F-68 89 Other commitments: The Corporation entered into a commitment to purchase $25,000,000 of mortgage loans from another institution with the option of purchasing additional loans up to $150,000,000. The commitment expires on June 30, 1999. The purchased mortgage loans will continue to be serviced by the originating institution. As of December 31, 1997, no loans have been purchased under this agreement. Geographic concentration: A geographic concentration exists within the Corporation's loan portfolio since most of its business activity is with customers located in Puerto Rico. As of December 31, 1997, the Corporation had no significant concentrations of credit risk and no significant exposure to highly leveraged transactions in its loan portfolio. The asset composition of the Corporation by geographical area at December 31, was as follows:
1997 1996 (Dollars in thousands) ----------------------------------------------------- Puerto Rico $14,189,332 73.5% $ 12,386,136 73.9% United States 4,616,196 23.9 3,756,526 22.4 U.S. and British Virgin Islands and Latin America 494,979 2.6 621,441 3.7 ----------------------------------------------------- $19,300,507 100.0% $16,764,103 100.0% =====================================================
Included in total assets of Puerto Rico are investments in obligations of the U.S. Treasury and U.S. Government agencies amounting to $3.8 billion and $2.9 billion in 1997 and 1996, respectively. NOTE 25 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS: The information about the estimated fair values of financial instruments required by generally accepted accounting principles is presented hereunder including some items not recognized in the statement of condition. A financial instrument is defined as cash, evidence of an ownership interest in an entity, or a contract that creates a contractual obligation or right to deliver to or receive cash or another financial instrument from a second entity on potentially favorable terms with the first entity. All nonfinancial instruments and certain other specific items are excluded from the fair value disclosure requirements. For those financial instruments with no quoted market prices available, fair values have been estimated using present value or other valuation techniques. These techniques are inherently subjective and are significantly affected by the assumptions used, including the discount rates, estimates of future cash flows and prepayment assumptions. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. The fair values reflected herein have been determined based on the prevailing interest rate environment as of December 31, 1997 and 1996, respectively. In different interest rate environments, fair value results can differ significantly, especially for certain fixed rate financial instruments and non-accrual assets. In addition, the fair values presented do not attempt to estimate the value of the Corporation's fee generating businesses and anticipated future business activities, that is, they do not represent the Corporation's value as a going concern. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Corporation. The estimated fair values of the Corporation's financial instruments, their carrying value and the methodologies used to estimate fair values are presented below. Short-term financial instruments: Short-term financial instruments, both assets and liabilities, have been valued at their carrying amounts as reflected in the Corporation's Consolidated Statements of Condition. For these financial instruments, the carrying value may approximate fair value because of the relatively short period of time between the origination of the instruments and their expected realization. F-69 90 Included in this category are: cash and due from banks, federal funds sold and securities and mortgages purchased under agreements to resell, time deposits with other banks, bankers' acceptances, customers' liabilities on acceptances, accrued interest receivable, securities sold under agreements to repurchase, acceptances outstanding and accrued interest payable. Investment and trading securities: Investment and trading securities are financial instruments which trade regularly on secondary markets. The estimated fair value of these securities was determined using either market prices or dealer quotes, where available, or quoted market prices of financial instruments with similar characteristics. The fair value of investment securities available-for-sale and trading securities equals their carrying value since they are marked-to-market for accounting purposes. These instruments are detailed in the Statements of Condition and in notes 3, 4 and 26. Loans held-for-sale: Estimated fair value of loans held-for-sale as of December 31, 1997, was $265,421,000 (1996 - $257,183,000) based on secondary market prices. Loans: Estimated fair values have been determined for groups of loans with similar financial characteristics. Loans were segregated by type such as commercial, construction, residential mortgage, consumer and credit cards. Each loan category was further segmented based on collateral, interest repricing and accrual vs. non-accrual status. For variable rate loans with frequent repricing terms and no significant change in credit risk, fair values were based on carrying values. Commercial loans with fixed rates were segregated into commercial real estate, cash collateral and other. Consumer loans were segregated by type such as personal, auto, boat, student, credit cards, reserve lines and home equity loans. Personal loans were further subdivided in mortgage-guaranteed, cash collateral and unsecured. The fair values of fixed-rate commercial, construction and consumer loans were estimated by discounting scheduled cash flows using prevailing market rates for those loans. For non-accruing loans, the estimated fair values were based on the discounted value of estimated cash flows. For these loans, principal-only cash flows were adjusted to reflect projected charge-offs. Interest cash flows were determined based on historical collection experience. Residential mortgage loans were valued using quoted market prices, where available, and market prices of traded loans with similar credit ratings, interest rates and maturity dates adjusted for estimated prepayments. Generally accepted accounting principles do not require, nor the Corporation has performed, a fair valuation of its lease financing portfolio. Therefore, for presentation purposes only, leases are shown below with fair value equal to its carrying value.
1997 1996 ------------------------------------------------------------- Estimated Estimated Carrying value fair value Carrying value fair value ------------------------------------------------------------- (In thousands) Commercial ............................ $ 4,637,409 $ 4,646,199 $3,822,096 $3,821,956 Construction .......................... 250,111 248,953 200,083 200,576 Lease financing ....................... 581,927 581,927 516,001 516,001 Mortgage .............................. 2,568,693 2,614,296 2,381,332 2,399,493 Consumer (including credit cards) ..... 3,073,264 3,013,351 2,604,387 2,656,156 Less: Allowance for loan losses ...... 211,651 185,574 ------------------------------------------------------------- $10,899,753 $11,104,726 $9,338,325 $9,594,182 =============================================================
Deposits: As specified by SFAS 107, "Disclosures about Fair Value of Financial Instruments," the fair value of deposits with no stated maturity, such as non-interest bearing demand deposits, savings, NOW and money market accounts, which at December 31, 1997 and 1996, comprised 64% and 62%, respectively, of the Corporation's total deposits, is equal to the amount payable on demand as of the respective dates. The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates offered at December 31, 1997 and 1996, respectively, for deposits with similar remaining maturities. F-70 91
1997 1996 ------------------------------------------------------------- Estimated Estimated Carrying value fair value Carrying value fair value ------------------------------------------------------------- (In thousands) Non-interest bearing deposits ......... $ 2,546,836 $ 2,546,836 $ 2,330,704 $ 2,330,704 Savings accounts ...................... 3,584,963 3,584,963 3,201,367 3,201,367 NOW and money market accounts ............................ 1,357,519 1,357,519 1,173,496 1,173,496 Certificates of deposit ............... 4,260,268 4,310,289 4,057,708 4,060,727 ------------------------------------------------------------- $11,749,586 $11,799,607 $10,763,275 $10,766,294 =============================================================
Borrowings and long-term debt: Borrowings and long-term debt, which include other short-term borrowings, notes payable, senior debentures, subordinated notes and capital securities, were valued using quoted market rates for similar instruments at December 31, 1997 and 1996, respectively. Included within other short-term borrowings at December 31, 1997, were $183,999,000 (1996 - $290,091,000) in commercial paper issued by the Corporation which has been valued at its carrying amount because of the relatively short period of time between its origination and maturity.
1997 1996 ------------------------------------------------------------- Estimated Estimated Carrying value fair value Carrying value fair value ------------------------------------------------------------- (In thousands) Other short-term borrowings ........... $ 1,287,435 $ 1,287,306 $1,404,006 $1,404,744 Notes payable ......................... 1,403,696 1,413,748 986,713 989,970 Senior debentures ..................... 30,000 30,000 Subordinated notes .................... 125,000 126,132 125,000 116,699 Capital securities .................... 150,000 158,481
Commitments to extend credit and standby letters of credit: Commitments to extend credit were fair valued using the fees currently charged to enter into similar agreements. For those commitments where a future stream of fees is charged, the fair value was estimated by discounting the projected cash flows of fees on commitments which are expected to be disbursed, based on historical experience. The fair value of letters of credit is based on fees currently charged on similar agreements. At December 31, 1997, the Corporation had $2,666,123,000 and $72,596,000 in commitments to extend credit and letters of credit, respectively (1996 - $2,338,952,000 and $137,602,000). The estimated fair value of these financial instruments with no carrying value was $8,577,000 (1996 - $9,137,000). NOTE 26 - RISK MANAGEMENT AND TRADING ACTIVITIES The Corporation's exposure to market risk relates to changes in interest rates or in the fair value of the underlying financial instruments and, to a limited extent, to fluctuations in foreign currency exchange rates. The operations are subject to the risk of interest rate fluctuations to the extent that interest-earning assets and interest-bearing liabilities mature or reprice at different times or in differing amounts. Risk management activities are aimed at optimizing net interest income, consistent with the Corporation's business strategies. Among the various methods used by the Corporation to measure the risks generated by assets and liabilities are beta-adjusted gap analysis, simulations and duration analysis. In managing its market risk the Corporation enters, to a limited extent, into certain derivative instruments that expose it to credit risk, which represent the risk that the counterparties might default on their obligations. To manage the level of credit risk the Corporation deals with counterparties of good credit standing, enters into master netting agreements whenever possible and, when appropriate, obtains collateral. Concentrations of credit risk which arise through the Corporation's trading and nontrading activities are presented in Note 24. The following table indicates the types of derivative financial instruments the Corporation held at December 31. The credit exposure is represented by the fair value of the instruments with a positive market value. The table should be read in conjunction with the descriptions of these products and the Corporation's objectives for holding them which immediately follows. F-71 92
1997 1996 ------------------------------------------------------------------------------ Notional Average for the Fair Notional Average for the Fair amount year value amount year value ------------------------------------------------------------------------------ (In thousands) Interest rate swaps: Pay floating/receive fixed ....... $ 15,000 $ 20,181 $ 108 $ 25,000 $ 21,250 $ 98 Pay fixed/receive floating ....... 215,000 167,180 (1,678) 115,000 115,000 (13) Interest rate swaptions ........... 32,271 29,360 23,277 22,149 14,683 1,233 Interest rate futures ............. 28,357 Interest rate options ............. 60,917 238,830 533 Interest rate caps ................ 3,413 1,351 41 Interest rate floors .............. 3,413 1,351 (46) Foreign exchange contracts ........ 1,234 1,047 178 748
Interest rate swaps: Interest rate swap agreements generally involve the exchange of fixed and floating rate interest payment obligations without the exchange of the underlying principal. Net interest settlements on interest rate swaps are recorded as an adjustment to interest income or interest expense of the hedged item.
1997 1996 ----------------------- (Dollars in thousands) Activity of interest rate swaps hedges for the year: Beginning balance ................................. $ 140,000 $ 125,000 New swaps ......................................... 170,000 15,000 Matured swaps ..................................... (80,000) ----------------------- Ending balance .................................... $ 230,000 $ 140,000 ======================= Pay floating/receive fixed: Weighted average receive rate at December 31 ...... 6.42% 6.54% Weighted average pay rate at December 31 .......... 5.94 5.81 Pay fixed/receive floating: Weighted average receive rate at December 31 ...... 5.88% 5.82% Weighted average pay rate at December 31 .......... 6.24 6.31
The agreements were entered into to change the Corporation's interest rate exposure and they end at the time the related obligation matures. The variable rates are based on the three-month and six-month LIBOR rates. Non-performance by any of the counterparties on this agreement will expose the Corporation to an interest rate risk which management deems to be immaterial. Interest rate swaptions: The Corporation enters into "swaption" derivative securities, which combine the characteristics of interest rate swaps and options, for hedging purposes. BPPR issues certificates of deposit with returns linked to the Standard and Poor's 500 index (the index). In order to hedge the cost of these certificates, positions in swaptions are assumed. These swaptions earn a return to the Corporation equal to the appreciation in the index throughout the life of the certificate of deposit issued. In exchange, the Corporation pays the counterparty a fixed rate of interest. Interest rate futures: Financial futures contracts are agreements to buy or sell a notional amount of a financial instrument at a given time in the future. Options on futures contracts confer the right from seller to buyer to take a future position at a stated price. Risks arise from the possible inability of counterparties to meet the terms of their contracts and from movements in securities values and interest rates. F-72 93 Interest rate options and caps: Interest rate options are contracts that grant the purchaser, for a premium payment, the right to either purchase from or sell to the writer of the option a financial instrument at a specified price within a specified period of time or on a specified date. Interest rate caps and floors are option-like contracts that require the writer to pay the purchaser at specified future dates the amount, if any, by which a specified market interest rate exceeds the fixed cap rate or falls below the fixed floor rate, applied to a notional principal amount. The option writer receives a premium for bearing the risk of unfavorable interest rate changes. Foreign exchange contracts: To satisfy the needs of its customers, from time to time, the Corporation enters into foreign exchange contracts in the spot or futures market. Spot contracts require the exchange of two currencies at an agreed rate to occur within two business days of the contract date. Forward and futures contracts to purchase or sell currencies at a future date settle over periods of up to one year, in general. Futures and forward contracts are recorded at market value. Securities sold not yet purchased: The Corporation enters in securities sold not yet purchased transactions for hedging strategies and for trading purposes. Various assets and liabilities, such as investment securities financed by borrowings, are usually hedged to lock-in spreads and reduce the risk of losses in value due to interest rate fluctuations. At December 31, 1996, securities sold short amounting to $59,315,000 were used to hedge $59,819,000 of auto loans held-for-sale. The securities sold short are recorded as other short-term borrowings on the statement of condition at market. Gains and losses are deferred until gains or losses on the related hedged item are recognized. At December 31, 1996, the Corporation had deferred gains and losses of $195,000 and $41,000, respectively, related to these activities. Open positions on securities sold short for trading purposes are usually closed at each month-end. The volume of such transactions is not significant, as further discussed below. Trading activities: The Corporation maintains limited trading positions in certain financial instruments and nonfinancial contracts including, to a limited extent, derivatives. Most of the Corporation's trading activities are limited to the purchase of debt securities for the purpose of selling them in the near term and positioning securities for resale to retail customers. Trading activities of the Corporation are subject to strict guidelines approved by the Board of Directors and included in the investment policy. In anticipation of customer demand, the Corporation carries an inventory of capital market instruments and maintains market liquidity by quoting bid and offer prices to and trading with other market makers. Positions are also taken in interest rate sensitive instruments, based on expectations of future market conditions. These activities constitute the proprietary trading business and are held by the Corporation to provide customers with financial products at competitive prices. As trading strategies depend on both market-making and proprietary positions, given the relationship between instruments and markets, those activities are managed in concert in order to maximize net trading revenue. All trading instruments are subject to market risk, the risk that future changes in market conditions may make an instrument less valuable or more onerous. Fluctuations in market prices, interest rates or exchange rates change the market value of the instruments. As the instruments are recognized at market value, these changes directly affect reported income. Exposure to market risk is managed, in accordance with risk limits set by senior management, by buying or selling instruments or entering into offsetting positions. The Corporation held no futures or options contracts written for trading purposes at December 31, 1997. For 1996, the contract amounts of futures and options written for trading purposes were $3,210,000 and $6,079,000, respectively. The following table indicates the fair value and net gains (losses) of derivatives financial instruments held for trading purposes. F-73 94
Fair Value ---------------------------------------------------------------------- At December 31, 1997 Average for the period Net gains Assets Liabilities Assets Liabilities (losses) ---------------------------------------------------------------------- (In thousands) Futures contracts...... $0 $0 $0 $1 $(23) Options................ 0 0 0 11 (41) Fair Value ---------------------------------------------------------------------- At December 31, 1996 Average for the period Net gains Assets Liabilities Assets Liabilities (losses) ---------------------------------------------------------------------- (In thousands) Futures contracts...... $0 $135 $140 $34 $(274) Options................ 0 73 0 48 121
The Corporation's credit exposure from off-balance sheet derivative financial instruments held or issued for trading purposes is represented by the fair value of the instruments with a positive fair value at that date. NOTE 27 - SUPPLEMENTAL DISCLOSURE ON THE CONSOLIDATED STATEMENTS OF CASH FLOWS: During the year ended December 31, 1997, the Corporation paid interest and income taxes amounting to $703,553,000 and $88,752,000, respectively (1996 - $579,733,000 and $76,324,000; 1995 - $515,960,000 and $42,383,000). In addition, loans transferred to other real estate and other property for the year ended December 31, 1997, amounted to $22,727,000 and $7,606,000, respectively (1996 - $3,333,000 and $5,640,000). NOTE 28 - CONTINGENT LIABILITIES: The Corporation is a defendant in a number of legal proceedings arising in the normal course of business. Management believes, based on the opinion of legal counsel, that the final disposition of these matters will not have a material adverse effect on the Corporation's financial position or results of operations. NOTE 29 - POPULAR, INC. (HOLDING COMPANY ONLY) FINANCIAL INFORMATION: The following condensed financial information presents the financial position of the Holding Company only as of December 31, 1997 and 1996 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997. F-74 95 STATEMENTS OF CONDITION
December 31, --------------------------- 1997 1996 --------------------------- (In thousands) ASSETS Cash .................................................................... $ 378 $ 191 Money market investments ................................................ 55,024 Investment securities available-for-sale, at market value ............... 88,371 69,486 Investment in BPPR, at equity ........................................... 1,255,880 1,009,648 Investment in Banco Popular, Illinois, at equity ........................ 128,089 39,820 Investment in Banco Popular, FSB, at equity ............................. 148,038 130,577 Investment in Banco Popular, N.A. (California), at equity ............... 14,187 12,566 Investment in other subsidaries, at equity .............................. 26,933 47,365 Advances to subsidiaries ................................................ 691,706 634,257 Premises and equipment .................................................. 39,176 Other assets ............................................................ 3,683 3,348 --------------------------- Total assets .......................................................... $ 2,357,265 $ 2,041,458 =========================== LIABILITIES AND STOCKHOLDERS' EQUITY Securities sold under agreements to repurchase .......................... $ 51,775 $ 52,084 Commercial paper ........................................................ 98,099 164,379 Other short-term borrowings ............................................. 21,700 65,000 Notes payable ........................................................... 535,263 320,539 Senior debentures ....................................................... 30,000 Accrued expenses and other liabilities .................................. 22,336 21,924 Subordinated notes ...................................................... 125,000 125,000 Stockholders' equity .................................................... 1,503,092 1,262,532 --------------------------- Total liabilities and stockholders' equity ............................ $ 2,357,265 $ 2,041,458 ===========================
STATEMENTS OF INCOME
Year ended December 31, ---------------------------------------- 1997 1996 1995 ---------------------------------------- (In thousands) Income: Dividends from subsidiaries ........................................ $ 53,000 $ 42,608 $ 76,600 Interest on money market and investment securities ................. 5,355 4,828 3,897 Other operating income ............................................. 496 2,394 1,347 Interest on advances to subsidiaries ............................... 45,434 42,047 26,258 ---------------------------------------- Total income ...................................................... 104,285 91,877 108,102 ---------------------------------------- Expenses: Interest expense ................................................... 53,182 42,761 25,824 Operating expenses ................................................. 1,494 1,698 671 ---------------------------------------- Total expenses .................................................... 54,676 44,459 26,495 ---------------------------------------- Income before income taxes and equity in undistributed earnings of subsidiaries ........................................... 49,609 47,418 81,607 Income taxes ......................................................... (1,573) 1,109 6,787 ---------------------------------------- Income before equity in undistributed earnings of subsidiaries ....... 51,182 46,309 74,820 Equity in undistributed earnings of subsidiaries ..................... 158,383 138,841 71,541 ---------------------------------------- Net income ........................................................ $ 209,565 $ 185,150 $ 146,361 ========================================
F-75 96 STATEMENTS OF CASH FLOWS
Year ended December 31, ---------------------------------------- 1997 1996 1995 ---------------------------------------- (In thousands) Cash flows from operating activities: Net income ......................................................... $ 209,565 $ 185,150 $ 146,361 ---------------------------------------- Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed earnings of subsidiaries ................ (158,383) (138,841) (71,541) Dividend in kind received from a subsidiary ..................... (41,600) Depreciation of premises and equipment .......................... 1,345 1,621 829 Loss on disposition of premises and equipment ................... 3,295 Gain on sale of investment securities available-for-sale ........ (824) Amortization of premiums and accretion of discounts on investments .................................................... 20 22 23 Net increase in other assets .................................... (335) (914) (1,163) Net decrease in current taxes ................................... (86) (3,182) Net decrease in interest payable ................................ (4,199) Net (decrease) increase in other liabilities .................... (2,190) 4,554 5,363 ----------------------------------------- Total adjustments ........................................... (161,357) (136,740) (108,089) ----------------------------------------- Net cash provided by operating activities ................... 48,208 48,410 38,272 ----------------------------------------- Cash flows from investing activities: Net decrease (increase) in money market investments ............... 55,024 (47,564) 581 Purchases of investment securities available-for-sale .............. (5,560) (1,538) (14,178) Maturities of investment securities available-for-sale ............. 682 883 Sales of investment securities available-for-sale .................. 2,365 Capital contribution to subsidiaries ............................... (58,500) (30,000) (16,130) Distribution from subsidiary ....................................... 392 Advances to subsidiaries ........................................... (57,449) (100,940) (374,047) Acquisition of premises and equipment .............................. (15) (3) (22) Proceeds from sale of premises and equipment ....................... 34,551 ----------------------------------------- Net cash used in investing activities ....................... (28,902) (178,770) (403,796) ----------------------------------------- Cash flows from financing activities: Net (decrease) increase in securities sold under agreements to repurchase .......................................... (309) (191) 42,425 Net (decrease) increase in commercial paper ........................ (66,280) (10,349) 41,934 Net (decrease) increase in other short-term borrowings ............. (43,300) 30,600 34,400 Net increase in notes payable ...................................... 214,724 158,039 162,500 Payment of senior debentures ....................................... (30,000) Cash dividends paid ................................................ (59,037) (51,896) (44,521) Proceeds from issuance of subordinated notes ....................... 125,000 Proceeds from issuance of common stock ............................. 4,642 4,135 3,500 Treasury stock acquired, at cost ................................... (39,559) ----------------------------------------- Net cash (used) provided by financing activities ............ (19,119) 130,338 365,238 ----------------------------------------- Net increase (decrease) in cash .................................... 187 (22) (286) Cash at beginning of period ........................................ 191 213 499 ----------------------------------------- Cash at end of period .............................................. $ 378 $ 191 $ 213 =========================================
The principal source of income for the Holding Company consists of dividends from BPPR. As a member subject to the regulations of the Federal Reserve Board, BPPR must obtain the approval of the Federal Reserve Board for any dividend if the total of all dividends declared by it in any calendar year would exceed the total of its net profits for that year, as defined by the Federal Reserve Board, combined with its retained net profits for the preceding two years. The payment of dividends by BPPR may also be affected by other regulatory requirements and policies, such as the maintenance of certain minimum capital levels. F-76 97 NOTE 30 - POPULAR INTERNATIONAL BANK, INC. (A SUBSIDIARY OF POPULAR, INC.) FINANCIAL INFORMATION: The following summarized financial information presents the consolidated financial position of Popular International Bank, Inc. and its subsidiaries as of November 30, 1997 and 1996, and the results of their operations, cash flows and changes in stockholder's equity for each of the three years in the period ended November 30, 1997. Popular International Bank, Inc., is the holding company of Popular North America, Inc., including Banco Popular North America and its wholly-owned subsidiary Banco Popular, Illinois, Banco Popular, N.A. (Texas), Banco Popular, N.A. (California), Banco Popular, N.A. (Florida) and Banco Popular, FSB (second-tier subsidiaries) and its wholly-owned subsidiary Equity One, Inc. STATEMENTS OF CONDITION
November 30, --------------------------- 1997 1996 --------------------------- (In thousands) ASSETS Cash .................................................................. $ 70,315 $ 31,171 Money market investments .............................................. 36,126 49,184 Investment securities available-for-sale, at market value ............. 323,152 205,249 Investment securities held-to-maturity, at cost ....................... 18,054 12,232 Loans held-for-sale ................................................... 50,886 48,068 Loans ................................................................. 2,127,817 1,545,262 Less: Unearned income ........................................... 55,295 47,420 Allowance for loan losses ............................. 30,907 22,920 --------------------------- 2,041,615 1,474,922 --------------------------- Other assets .......................................................... 93,120 50,672 Intangible assets ..................................................... 82,726 31,232 --------------------------- Total assets .................................................... $ 2,715,994 $ 1,902,730 =========================== LIABILITIES AND STOCKHOLDER'S EQUITY Deposits: Non-interest bearing ............................................... $ 211,396 $ 94,297 Interest bearing ................................................... 1,003,792 593,195 --------------------------- 1,215,188 687,492 --------------------------- Federal funds purchased and securities sold under agreements to repurchase ........................................................ 24,288 5,075 Other short-term borrowings, consisting of $269,732 in term notes (1996 - $375,625), and a revolving credit facility with an affiliate of $10,000 (1996 - $35,000) ................................ 279,732 410,625 Notes payable (Note 12) ............................................... 704,507 579,277 Other liabilities ..................................................... 52,473 38,722 Preferred beneficial interests in Popular North America's junior subordinated deferrable interest debentures guaranteed by the Corporation .................................................... 150,000 Stockholder's equity .................................................. 289,806 181,539 --------------------------- Total liabilities and stockholder's equity ..................... $ 2,715,994 $ 1,902,730 ===========================
F-77 98 STATEMENTS OF INCOME
Year ended November 30, ---------------------------------------- 1997 1996 1995 ---------------------------------------- (In thousands) Interest and fees: Loans .............................................................. $ 192,202 $ 136,824 $ 101,442 Money market and investment securities ............................. 24,658 16,188 18,948 ---------------------------------------- 216,860 153,012 120,390 ---------------------------------------- Interest expense: Deposits ........................................................... 35,972 24,000 21,225 Short-term borrowings .............................................. 23,092 22,572 6,595 Long-term borrowings ............................................... 55,603 35,265 39,847 ---------------------------------------- 114,667 81,837 67,667 ---------------------------------------- Net interest income .................................................. 102,193 71,175 52,723 Provision for loan losses ............................................ 17,041 14,299 8,651 ---------------------------------------- Net interest income after provision for loan losses .................. 85,152 56,876 44,072 Service charges on deposit accounts .................................. 5,588 2,735 1,844 Other service fees ................................................... 8,159 4,663 3,813 Gain on sale of securities ........................................... 339 7,026 6,239 Other operating income ............................................... 11,817 5,342 6,738 ---------------------------------------- 111,055 76,642 62,706 ---------------------------------------- Operating expenses ................................................... 85,031 46,509 35,782 ---------------------------------------- Income before income tax ............................................. 26,024 30,133 26,924 Income tax ........................................................... 11,192 12,978 10,629 ---------------------------------------- Net income ........................................................... $ 14,832 $ 17,155 $ 16,295 ========================================
F-78 99 STATEMENTS OF CASH FLOWS
Year ended November 30, -------------------------------------- 1997 1996 1995 -------------------------------------- (In thousands) -------------------------------------- Cash flows from operating activities: Net income ................................................................... $ 14,832 $ 17,155 $ 16,295 -------------------------------------- Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization of premises and equipment ..................... 3,136 1,833 1,136 Provision for loan losses ................................................... 17,041 14,299 8,651 Amortization of intangibles ................................................. 5,850 3,460 3,321 Amortization of deferred loan fees and costs ................................ (1,529) (1,922) 6,467 Amortization of premiums and accretion of discounts on investments ............................................................... 1,271 267 446 Increase in loans held-for-sale ............................................. (2,817) (24,513) Gain on sale of investment securities available-for-sale .................... (339) (7,026) (6,239) Gain on disposition of premises and equipment ............................... (655) Gain on sale of loans ....................................................... (10,133) (8,049) (6,676) Net increase in interest receivable ......................................... (5,395) (1,286) (5,375) Net increase in other assets ................................................ (5,312) (1,915) (5,046) Net increase in interest payable ............................................ 5,008 Net decrease in current and deferred taxes .................................. (3,556) (1,942) Net (decrease) increase in other liabilities ................................ (1,884) 5,392 7,509 -------------------------------------- Total adjustments ..................................................... 686 (21,402) 4,194 -------------------------------------- Net cash provided (used) by operating activities ...................... 15,518 (4,247) 20,489 -------------------------------------- Cash flows from investing activities: Net decrease (increase) in money market investments .......................... 24,058 (15,676) 3,489 Purchases of investment securities held-to-maturity .......................... (270) (6,214) Purchases of investment securities available-for-sale ........................ (526,337) (71,955) (358,811) Maturities of investment securities held-to-maturity ......................... 2,750 Sale of investment securities available-for-sale ............................. 506,365 61,205 183,091 Maturities of investment securities available-for-sale ....................... 70,092 98,011 50,000 Net disbursements on loans ................................................... (539,951) (574,754) (357,540) Proceeds from sale of loans .................................................. 294,001 285,771 70,155 Acquisition of loan portfolios ............................................... (10,853) (18,059) Assets acquired, net of cash ................................................. (36,734) (2,656) Acquisition of premises and equipment ........................................ (17,974) (4,794) (4,941) Proceeds from sales of premises and equipment ................................ 5,857 -------------------------------------- Net cash used in investing activities ................................. (228,996) (231,062) (432,616) -------------------------------------- Cash flows from financing activities: Net increase in deposits ..................................................... 56,092 42,735 43,211 Net deposits acquired ........................................................ 163,504 Net (decrease) increase in federal funds purchased and securities sold under agreements to repurchase ......................................... (169) 1,040 (8,965) Net (decrease) increase in other short-term borrowings ....................... (130,893) 222,514 (24,870) Proceeds from issuance of notes payable ...................................... 964,931 30,024 234,215 Payments of notes payable .................................................... (845,840) (84,885) Proceed from issuance of Capital Securities .................................. 150,000 Proceeds from issuance of common stock ....................................... 462 150 Capital contribution from Parent company ..................................... 58,039 29,850 -------------------------------------- Net cash provided by financing activities ............................. 252,622 241,428 407,095 -------------------------------------- Net increase (decrease) in cash and due from banks ............................. 39,144 6,119 (5,032) Cash and due from banks at beginning of year ................................... 31,171 25,052 30,084 -------------------------------------- Cash and due from banks at end of year ......................................... $ 70,315 $ 31,171 $ 25,052 ======================================
F-79 100 STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
Year ended November 30, -------------------------------------- 1997 1996 1995 -------------------------------------- (In thousands) Preferred Stock: Par value $25; authorized 25,000,000 shares, none issued Common Stock: Par value $5; authorized 1,000,000 shares, 792,300 shares issued and outstanding (1996 - 700,000; 1995 - 670,000) Balance at beginning of the period ........................................... $ 3,500 $ 3,350 $ 3,350 Issuance of common stock ..................................................... 462 150 -------------------------------------- Balance at end of the period ................................................. 3,962 3,500 3,350 -------------------------------------- Additional paid-in capital: Balance at beginning of the period ........................................... 132,964 103,114 103,114 Capital contribution from Parent company ..................................... 91,900 29,850 -------------------------------------- Balance at end of the period ................................................. 224,864 132,964 103,114 -------------------------------------- Retained earnings: Balance at beginning of the period ........................................... 44,389 27,234 10,939 Net income ................................................................... 14,832 17,155 16,295 -------------------------------------- Balance at end of the period ................................................. 59,221 44,389 27,234 -------------------------------------- Unrealized holding gains (losses) on investment securities available-for-sale, net of deferred taxes: Balance at beginning of the period ........................................... 686 5,437 (2,473) Net change in the fair value of investment securities available-for-sale, net of deferred taxes ................................... 1,073 (4,751) 7,910 -------------------------------------- Balance at end of period ..................................................... 1,759 686 5,437 -------------------------------------- Total stockholder's equity .................................................. $ 289,806 $ 181,539 $ 139,135 ======================================
NOTE 31 - POPULAR NORTH AMERICA, INC. (A SECOND - TIER SUBSIDIARY OF POPULAR, INC.) FINANCIAL INFORMATION: The following summarized financial information presents the consolidated financial position of Popular North America, Inc. and its subsidiaries, Banco Popular North America and its wholly-owned subsidiary Banco Popular, Illinois, Banco Popular, N.A. (Florida), Banco Popular, FSB, including its wholly-owned subsidiary Equity One, Inc., Banco Popular N.A. (California) and Banco Popular N.A. (Texas) (second tier subsidiaries) as of November 30, 1997 and 1996, and the results of their operations, cash flows and changes in stockholder's equity for each of the three years in the period ended November 30, 1997. F-80 101 STATEMENTS OF CONDITION
November 30, --------------------------- 1997 1996 --------------------------- (In thousands) ASSETS Cash and due from banks ............................................... $ 70,207 $ 29,936 Money market investments .............................................. 33,709 46,399 Investment securities available-for-sale, at market value ............. 323,090 205,181 Investment securities held-to-maturity, at cost ....................... 18,054 12,232 Loans held-for-sale ................................................... 50,886 48,068 Loans ................................................................. 2,127,817 1,545,262 Less: Unearned income ................................................ 55,295 47,420 Allowance for loan losses ...................................... 30,907 22,920 --------------------------- 2,041,615 1,474,922 --------------------------- Other assets .......................................................... 90,304 50,525 Intangible assets ..................................................... 82,725 31,232 --------------------------- Total assets .................................................... $ 2,710,590 $ 1,898,495 =========================== LIABILITIES AND STOCKHOLDER'S EQUITY Deposits: Non-interest bearing ................................................. $ 211,396 $ 94,297 Interest bearing ..................................................... 1,003,792 593,195 --------------------------- 1,215,188 687,492 --------------------------- Federal funds purchased and securities sold under agreements to repurchase ........................................................ 24,288 5,075 Other short-term borrowings, consisting of $269,732 term notes (1996 - $375,625) and a revolving credit facility with an affiliate of $10,000 (1996 - $35,000) ............................... 279,732 410,625 Notes payable (Note 12) ............................................... 704,507 579,277 Other liabilities ..................................................... 52,190 38,699 Preferred beneficial interests in Popular North America's junior subordinated deferrable interest debentures guaranteed by the Corporation ...................................... 150,000 Stockholder's equity .................................................. 284,685 177,327 --------------------------- Total liabilities and stockholder's equity ...................... $ 2,710,590 $ 1,898,495 ===========================
F-81 102 STATEMENTS OF INCOME
Year ended November 30, -------------------------------------- 1997 1996 1995 -------------------------------------- (In thousands) Interest and fees: Loans ........................................................................ $ 192,202 $ 136,824 $ 101,442 Money market and investment securities ....................................... 23,089 16,107 18,888 -------------------------------------- 215,291 152,931 120,330 -------------------------------------- Interest expense: Deposits ..................................................................... 35,972 24,000 21,225 Short-term borrowings ........................................................ 23,091 22,572 6,595 Long-term borrowings ......................................................... 55,602 35,265 39,847 -------------------------------------- 114,665 81,837 67,667 -------------------------------------- Net interest income ............................................................ 100,626 71,094 52,663 Provision for loan losses ...................................................... 17,041 14,299 8,651 -------------------------------------- Net interest income after provision for loan losses ............................ 83,585 56,795 44,012 Service charges on deposit accounts ............................................ 5,588 2,735 1,844 Other service fees ............................................................. 8,149 4,663 3,813 Gain on sale of securities ..................................................... 308 7,026 6,239 Other operating income ......................................................... 11,926 5,457 6,738 -------------------------------------- 109,556 76,676 62,646 -------------------------------------- Operating expenses ............................................................. 84,512 46,600 35,778 -------------------------------------- Income before tax .............................................................. 25,044 30,076 26,868 Income tax ..................................................................... 11,192 12,978 10,629 -------------------------------------- Net income ..................................................................... $ 13,852 $ 17,098 $ 16,239 ======================================
F-82 103 STATEMENTS OF CASH FLOWS
Year ended November 30, -------------------------------------- 1997 1996 1995 -------------------------------------- (In thousands) Cash flows from operating activities: Net income ................................................................... $ 13,852 $ 17,098 $ 16,239 -------------------------------------- Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization of premises and equipment ..................... 3,092 1,833 1,136 Provision for loan losses ................................................... 17,041 14,299 8,651 Amortization of intangibles ................................................. 5,850 3,460 3,321 Amortization of deferred loan fees and costs ................................ (1,529) (1,922) 6,467 Amortization of premiums and accretion of discounts on investments .............................................................. 1,271 267 446 Increase in loans held-for-sale ............................................. (2,817) (24,513) Gain on sale of investment securities available-for-sale .................... (309) (7,026) (6,239) Gain on disposition of premises and equipment ............................... (655) Gain on sale of loans ....................................................... (10,133) (8,049) (6,676) Net increase in interest receivable ......................................... (5,395) (1,286) (5,368) Net increase in other assets ................................................ (5,137) (1,884) (4,940) Net increase in interest payable ............................................ 5,001 Net increase in current and deferred taxes .................................. (3,556) (1,942) Net increase in other liabilities ........................................... (788) 5,392 7,483 -------------------------------------- Total adjustments ....................................................... 1,936 (21,371) 4,281 -------------------------------------- Net cash provided (used) by operating activities ........................ 15,788 (4,273) 20,520 -------------------------------------- Cash flows from investing activities: Net decrease (increase) in money market investments .......................... 23,438 (13,912) 3,476 Purchases of investment securities held-to-maturity .......................... (270) (6,214) Maturities of investment securities held-to-maturity ......................... 2,750 Purchases of investment securities available-for-sale ........................ (526,272) (71,888) (358,811) Sale of investment securities available-for-sale ............................. 506,255 61,205 183,091 Maturities of investment securities available-for-sale ....................... 70,092 98,011 50,000 Net disbursements on loans ................................................... (539,951) (574,754) (357,540) Proceeds from sale of loans .................................................. 294,001 285,771 70,155 Acquisition of loan portfolios ............................................... (10,853) (18,059) Assets acquired, net of cash ................................................. (36,734) (2,656) Acquisition of premises and equipment ........................................ (16,542) (4,794) (4,941) Proceeds from sale of premises and equipment ................................. 5,695 -------------------------------------- Net cash used in investing activities ................................... (228,391) (229,231) (432,629) -------------------------------------- Cash flows from financing activities: Net increase in deposits ..................................................... 56,344 42,735 43,211 Net deposits acquired ........................................................ 163,504 Net (decrease) increase in federal funds purchased and securities sold under agreements to repurchase ......................................... (169) 1,040 (8,965) Net (decrease) increase in other short-term borrowings ....................... (130,892) 222,514 (24,870) Proceeds from issuance of notes payable ...................................... 964,931 30,024 234,215 Payments of note payable ..................................................... (845,840) (84,885) Proceeds from issuance of Capital Securities ................................. 150,000 Capital contribution from Parent company ..................................... 58,500 27,000 -------------------------------------- Net cash provided by financing activities ............................... 252,874 238,428 407,095 -------------------------------------- Net increase (decrease) in cash and due from banks ............................. 40,271 4,924 (5,014) Cash and due from banks at beginning of period ................................. 29,936 25,012 30,026 -------------------------------------- Cash and due from banks at end of period ....................................... $ 70,207 $ 29,936 $ 25,012 ======================================
F-83 104 STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
Year ended November 30, -------------------------------------- 1997 1996 1995 -------------------------------------- (In thousands) Preferred Stock: Par value $0.10; authorized 10,000,000 shares, none issued Common Stock: Par value $1; authorized 10,000 shares, 2,000 shares issued and outstanding Balance at beginning and end of the period ................................... $ 2 $ 2 $ 2 -------------------------------------- Additional paid-in capital: Balance at beginning of the period ........................................... 132,163 105,163 105,163 Capital contribution from parent company ..................................... 92,440 27,000 -------------------------------------- Balance at end of the period ................................................. 224,603 132,163 105,163 -------------------------------------- Retained earnings: Balance at beginning of the period ........................................... 44,477 27,379 11,140 Net income ................................................................... 13,852 17,098 16,239 -------------------------------------- Balance at end of the period ................................................ 58,329 44,477 27,379 -------------------------------------- Unrealized holding gains (losses) on investment securities available-for-sale, net of deferred taxes: Balance at beginning of the period ........................................... 685 5,437 (2,473) Net change in the fair value of investment securities available-for-sale, net of deferred taxes ................................... 1,066 (4,752) 7,910 -------------------------------------- Balance at end of period ..................................................... 1,751 685 5,437 -------------------------------------- Total stockholder's equity .............................................. $ 284,685 $ 177,327 $ 137,981 --------------------------------------
F-84 EX-3.1 2 RESTATED ARTICLES OF INCORPORATION AND BYLAWS 1 EXHIBIT 3.1 CERTIFICATE The undersigned, Richard L. Carrion, President of the Board of Directors, President and Chief Executive Office of BanPonce Corporation, and Samuel T. Cespedes, Secretary of the Board of Directors of BanPonce Corporation, hereby certify: That in the annual meeting of stockholders of BanPonce Corporation, held in the city of San Juan, Puerto Rico, on the 25th day of April, 1997, which was duly called together, the following resolutions were adopted amending Article First and Article Fifth of the Amended Articles of Incorporation of BanPonce Corporation by the affirmative vote of more than two thirds and the affirmative vote of the majority, respectively, of the common stock of BanPonce Corporation issued and outstanding: "RESOLVED, that Article First of the Restated Articles of Incorporation of BanPonce Corporation be, and it hereby is, amended in its entirely to read as follows: "FIRST: The name of the Corporation is Popular, Inc." RESOLVED, FURTHER, that the proper officers of the Corporation be, and hereby are, authorized and directed to take all actions, execute all instruments, and make all payments that are necessary or desirable, at their discretion, to make effective the foregoing amendment to the Restated Articles of Incorporation of the Corporation, including without limitation, filing a certificate of such amendment with the Secretary of State of the Commonwealth of Puerto Rico. RESOLVED, that Article Fifth of the Restated Articles of Incorporation of the Corporation be, and it hereby is, amended in its entirety to read as follows: "FIFTH: The minimum amount of capital with which the Corporation shall commence business shall be $1,000. The total number of shares of all classes of capital stock that the Corporation shall have authority to issue, upon resolutions approved by the Board of Directors from time to time, is one hundred ninety million shares (190,000,000), of which one hundred eighty million shares (180,000,000) shall be shares of Common Stock of the par value of $6, per shares (hereinafter called "Common Stock"), and ten million (10,000,000) shall be shares of Preferred Stock without par value (hereinafter called "Preferred Stock"). The amount of the authorized capital stock of any class or classes of stock may be increased or decreased by the affirmative vote of the holders of a majority of the stock of the Corporation entitled to vote. The designations and the powers, preferences and rights, and the qualifications, limitations or restrictions thereof, of the Preferred Stock shall be as follows: 2 (1) The Board of Directors is expressly authorized at any time, and from time to time, to provide for the issuance of shares of Preferred Stock in one or more series, and with such voting powers, full or limited but not to exceed one vote per share, or without voting powers, and with such designations, preferences, and relative participating, optional or other special rights, and qualifications, limitations or restrictions thereof, as shall be expressed in the resolution or resolutions providing for the issue thereof adopted by the Board of Directors and as are not otherwise expressed in this Certificate of Incorporation or any amendment thereto, including (but without limiting the generality of the foregoing) the following: (a) the designation of such series; (b) the purchase price that the Corporation shall receive for each share of such series; (c) the dividend rate of such series, the conditions and dates upon which such dividends shall be payable, the preference or relation that such dividends shall bear to the dividends payable on any other class or classes or on any other series of any class or classes of capital stock of the Corporation, and whether such dividends shall be cumulative or non-cumulative; (d) whether the shares of such series shall be subject to redemption by the Corporation, and, if made subject to such redemption, the times, prices and other terms and conditions of such redemption; (e) the terms and amounts of any sinking fund provided for the purchase or redemption of the shares of such series; (f) whether the shares of such series shall be convertible into or exchangeable for shares of any other class of classes or of any other series of any class or classes of capital stock of the Corporation, and, if provision be made for conversion or exchange, the times, prices, rates, adjustments and other terms and conditions of such conversion or exchange; (g) the extent, if any, to which the holders of the shares of such series shall be entitled to vote as a class or otherwise with respect to the election of directors or otherwise; (h) the restrictions and conditions, if any, upon the reissue of any additional Preferred Stock ranking on a parity with or prior to such shares as to dividends or upon dissolution; (i) the rights of the holders of the shares of such series upon the dissolution of, or upon the distribution of assets of, the Corporation, which rights may be different in the case of a voluntary dissolution than in the case of an involuntary dissolution. (2) Except as otherwise required by law and except for such voting powers with 2 3 respect to the election of directors or other matters as may be stated in the resolutions of the Board of Directors creating any series of Preferred Stock, the holders of any such series shall have no voting power whatsoever. RESOLVED FURTHER, that the proper officers of the Corporation be, and hereby are, authorized and directed to take all actions, execute all instruments, and make all payments that are necessary or desirable, at their discretion, to make effective the foregoing amendment to the Restated Articles of Incorporation of the Corporation, including without limitation on filing a certificate of such amendment with the Secretary of State of the Commonwealth of Puerto Rico." IN WITNESS WHEREOF, we have hereunto set our hands and affixed the seal of the Corporation in San Juan, Puerto Rico, this 25th day of April, 1997. S/RICHARD L. CARRION S/SAMUEL T. CESPEDES - -------------------------------------------------------------------------------- RICHARD L. CARRION SAMUEL T. CESPEDES PRESIDENT - BOARD OF DIRECTORS SECRETARY PRESIDENT AND CHIEF EXECUTIVE OFFICER Affidavit No. 730 Sworn and subscribed to before me by Richard L. Carrion, of legal age, married and resident of San Juan, Puerto Rico, in his capacity as President of the Board of Directors, President and Chief Executive Officer of BanPonce Corporation, and Samuel T. Cespedes, of legal age, married and residente of San Juan, Puerto Rico, in his capacity as Secretary of the Board of Directors of BanPonce Corporation, who are both personally known to me in San Juan, Puerto Rico, this 25th day of April, 1997. S/ESTELA MARTINEZ DE MIRANDA ---------------------------------------- NOTARY PUBLIC EX-12 3 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES 1 EXHIBIT 12.0 POPULAR, INC. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (Dollars in thousands)
Year Ended December 31, -------------------------------------------------------------------- 1997 1996 1995 1994 1993 Income before income taxes 284,026 256,027 206,130 175,177 132,140 Fixed charges: Interest expense 707,348 591,540 521,624 351,633 280,008 Estimated interest component of net rental payments 7,779 7,065 6,012 5,568 4,827 Total fixed charges including interest on deposits 715,127 598,605 527,636 357,201 284,835 Less: Interest on deposits 366,528 350,221 329,783 247,726 219,447 Total fixed charges excluding interest on deposits 348,599 248,384 197,853 109,475 65,388 Income before income taxes and fixed charges (including interest on deposits) $999,153 $854,632 $733,766 $532,378 $416,975 Income before income taxes and fixed charges (excluding interest on deposits) $632,625 $504,411 $403,983 $284,652 $197,528 Preferred stock dividends 8,350 8,350 8,350 $4,630 $770 Ratio of earnings to fixed charges Including Interest on Deposits 1.4 1.4 1.4 1.5 1.5 Excluding Interest on Deposits 1.8 2.0 2.0 2.6 3.0 Ratio of earnings to fixed charges & Preferred Stock Dividends Including Interest on Deposits 1.4 1.4 1.4 1.5 1.5 Excluding Interest on Deposits 1.8 2.0 2.0 2.5 3.0
EX-13.1 4 REGISTRANTS ANNUAL REPORT TO SHAREHOLDERS 1 [LOGO] POPULAR, Inc. 1997 Annual Report (Computerized Arts Graphic Design:) 2 CONTENTS Strengthening Our Brand 1 Lines of Business by Geographic Markets 2 10-Year Summary 4 Letter to Shareholders 7 Puerto Rico Strategy 13 United States Strategy 19 Caribbean and Latin American Strategy 23 Community Involvement 26 Senior Management 28 Boards of Directors 29 Management 30 10-K Financial Summary 31
3 Popular, Inc. 1997 Annual Report STRENGTHENING OUR BRAND Popular, Inc. (previously BanPonce Corporation), with $19.3 billion in total assets, is the 44th largest bank holding company in the United States. Banco Popular, its main subsidiary, is Puerto Rico's premier banking institution, with a tradition of more than 100 years of service. In addition to commercial banking, the Corporation offers mortgage lending, leasing, consumer finance, investment banking and processing services. Characterized by a strong commitment to the communities it serves and for using technology to make financial services more convenient and accessible to customers, the Corporation has grown from the leading banking institution in Puerto Rico to a provider of financial services in Puerto Rico, the United States and the Caribbean. The Corporation's business and geographic diversification in the U.S. is based on exporting its core competencies by focusing on retail financial services to the Hispanic population and commercial services to small and middle market businesses. In the Caribbean, the expansion capitalizes on the Corporation's technological expertise to provide electronic processing services. In 1997, the Corporation and its subsidiaries were renamed Popular, Inc. The unified branding will facilitate the recognition and positioning of the Corporation as it extends its reach across the hemisphere. The unified branding of Popular, Inc. will facilitate the recognition and positioning of the Corporation as it extends its reach across the hemisphere. 4 Popular, Inc. 1997 Annual Report LINES OF BUSINESS BY GEOGRAPHIC MARKETS PUERTO RICO COMMERCIAL BANKING/SAVINGS AND LOANS BANCO POPULAR - - Largest bank in Puerto Rico. - - Most extensive branch network in Puerto Rico with 201 branches. - - Full-service commercial and retail banking subsidiary. - - Established in 1893. - - Total assets of $12.9 billion. - - Most extensive ATM network "ATH" (At All Times) with 391 ATMs owned. - - Leader in deposit market with $8.6 billion. - - Leader in loan market with $6.7 billion. - - Dominant player in electronic services. MORTGAGE BANKING POPULAR MORTGAGE, INC. - - Banco Popular's mortgage banking subsidiary acquired in April 1995. - - Total assets of $145 million and a portfolio of $31 million in loans available for sale. - - Operates 3 offices located in the San Juan metropolitan area. LEASING BUSINESS POPULAR LEASING & RENTAL, INC. - - Popular Leasing, established in 1989, is engaged in finance leasing, equipment leasing and daily motor and equipment rental in Puerto Rico. - - Total assets of $599 million. - - Operates 5 sales offices and 10 daily rental outlets. CONSUMER FINANCE POPULAR FINANCE, INC. - - Small loan and secondary mortgage subsidiary. - - Established in 1970, acquired by BanPonce in 1987. - - Total assets of $153 million and $147 million in loans. - - Offers services through 39 small loan offices and 5 mortgage centers across the island. UNITED STATES COMMERCIAL BANKING/SAVINGS AND LOANS BANCO POPULAR (NEW YORK, CALIFORNIA, ILLINOIS AND TEXAS) - - Largest Hispanic branch network. - - Focus on serving the Hispanic market and small and middle market businesses. - - Opened first branch in 1961. - - Total assets of $3 billion, and $2.5 billion in deposits. - - Banco Popular branch network operates 29 branches in the New York City area, 6 in Los Angeles, 13 in Chicago, 6 in Florida and 1 in Texas. BANCO POPULAR, FSB (NEW JERSEY) - - Subsidiary of Popular North America, Inc.; a federal savings bank operating 8 branches in New Jersey. - - Total assets of $339 million, $231 million in total deposits and $225 million in total loans. LEASING BUSINESS POPULAR LEASING, U.S.A. - - Subsidiary that offers small ticket equipment leasing. - - Total assets of $14 million. - - Operates in 7 states. CONSUMER FINANCE EQUITY ONE, INC. - - Subsidiary of Banco Popular, FSB; engaged in the business of personal and mortgage loan and retail financing to more than 700 merchants and dealers. - - Established in 1989, acquired by BanPonce (now Popular, Inc.) in 1991. - - Total assets of $1.2 billion. - - Increased number of offices from 102 to 117; opened operations in two new states for a total of 29 states. CARIBBEAN COMMERCIAL BANKING/SAVINGS AND LOANS BANCO POPULAR (VIRGIN ISLANDS) - - Banco Popular branch network in British and U.S. Virgin Islands. - - Entered the Virgin Islands market in 1981. - - Total assets of $492 million and $454 million deposits. - - Operates 7 branches in the U.S. Virgin Islands and 1 in Tortola, British Virgin Islands; 2 consumer credit centers and 2 mortgage centers. PROCESSING SERVICES ATH DOMINICANA - - Joint venture with Banco Popular Dominicano and Codetel to establish the ATH network in the Dominican Republic. - - By year end 7 banks were connected to the network driving 233 ATM machines and 1,338 point of sale terminals. ATH COSTA RICA - - Reached agreement with 16 Costa Rican banks to provide ATM switching and driving services. - - The network connects 3 banks and operates 18 ATM machines concentrated in San Jose, Costa Rica. 5 INVESTMENT BANKING POPULAR SECURITIES INCORPORATED - - Securities broker-dealer in Puerto Rico, with brokerage, financial advisory, investment and security brokerage operations for institutional clients. - - Provided underwriting and/or investment banking services in 17 financing transactions totaling approximately $4.8 billion for distribution in P.R. and in cooperation with other broker dealers in the United States. - - The retail business was established in May 1997 and it offers investment products such as, GNMAs, bonds, stocks and mutual funds, among others. (PUERTO RICO GEOGRAPHIC MAP) CAGUAS REGION Banking Locations 17 Popular Leasing 1 Popular Finance 5 HATO REY REGION Banking Locations 21 Popular Leasing 2 Popular Mortgage 2 Popular Securities 2 Popular Finance 2 SAN JUAN REGION Banking Locations 25 ARECIBO REGION Branches 19 Popular Finance 7 WESTERN REGION Banking Locations 29 Popular Leasing 2 Popular Finance 8 EASTERN REGION Banking Locations 27 Popular Leasing 2 Popular Finance 3 RIO PIEDRAS REGION Banking Locations 23 Popular Leasing 1 Popular Finance 3 BAYAMON REGION Banking Locations 19 Popular Leasing 1 Popular Mortgage 1 Popular Finance 8 PONCE REGION Banking Locations 21 Popular Leasing 1 Popular Finance 8 TOTAL OFFICES 260
(U.S. GEOGRAPHIC PRESENCE OF POPULAR INC. SUBSIDIARY) BANKING STATES California 6 Illinois 13 New Jersey 8 New York 29 Florida 6 Texas 1 TOTAL OFFICES 63 POPULAR LEASING, U.S.A California 1 Colorado 1 Georgia 1 Illinois 1 New Jersey 1 Missouri 1 Pennsylvania 1 TOTAL OFFICES 7 EQUITY ONE Alabama 1 Connecticut 1 Delaware 3 Florida 12 Georgia 2 Illinois 2 Indiana 2 Iowa 1 Kentucky 5 Maine 1 Maryland 2 Massachusetts 2 Michigan 2 Minnesota 1 Missouri 1 Nebraska 1 Nevada 1 New Hampshire 1 New Jersey 7 North Carolina 18 Ohio 1 Pennsylvania 8 Rhode Island 1 South Carolina 12 Tennessee 3 Utah 1 Virginia 22 West Virginia 2 Wisconsin 1 TOTAL OFFICES 117
(CARIBBEAN AND SOUTH AMERICA GEOGRAPHIC MAP) PUERTO RICO (see above) DOMINICAN REPUBLIC AND COSTA RICA Processing Services BRITISH AND U.S. VIRGIN ISLANDS 8 Banking Locations 6 Popular, Inc. 1997 Annual Report 10-Year Summary Popular, Inc. has experienced significant growth and consistent returns over the past 10 years. Prudent management and visionary leadership are responsible for the Corporation's solid financial performance. [GRAPHS] 4 7 10-Year Summary (1988~1997)
- ---------------------------------------------------------------------------------------------------------------------- 1988 1989 1990 1991 1992 1993 - ---------------------------------------------------------------------------------------------------------------------- (Dollars in millions, except per common share data) - ---------------------------------------------------------------------------------------------------------------------- SELECTED FINANCIAL INFORMATION - ---------------------------------------------------------------------------------------------------------------------- Net Interest Income $ 226.9 255.5 284.2 407.8 440.2 492.1 Non-Interest Income 53.7 62.1 71.0 131.8 124.5 125.2 Operating Expenses 190.9 207.4 229.6 345.7 366.9 412.3 Net Income 47.1 56.2 63.4 64.6 85.1 109.4 - ---------------------------------------------------------------------------------------------------------------------- Total Assets $ 5,661.4 5,923.3 8,983.6 8,780.3 10,002.3 11,513.4 Net Loans 3,056.8 3,276.4 5,365.9 5,195.6 5,252.1 6,346.9 Deposits 4,715.8 4,926.3 7,422.7 7,207.1 8,038.7 8,522.7 Total Stockholders' Equity 334.9 375.8 588.9 631.8 752.1 834.2 - ---------------------------------------------------------------------------------------------------------------------- Market Capitalization $ 355.0 430.1 479.1 579.0 987.8 1,014.7 ROA 0.85% 0.99% 1.09% 0.72% 0.89% 1.02% ROE 14.87% 15.87% 15.55% 10.57% 12.72% 13.80% - ---------------------------------------------------------------------------------------------------------------------- PER COMMON SHARE - ---------------------------------------------------------------------------------------------------------------------- Earnings $ 1.18 1.40 1.57 1.07 1.40 1.67 Dividends (Declared) 0.34 0.40 0.40 0.40 0.40 0.45 Book Value 8.38 9.38 9.83 10.50 11.52 12.75 Market Price 8.88 10.75 8.00 9.63 15.13 15.50 - ---------------------------------------------------------------------------------------------------------------------- ASSETS BY GEOGRAPHIC AREA - ---------------------------------------------------------------------------------------------------------------------- P.R 93.45% 92.18% 88.59% 86.67% 87.33% 79.42% U.S 5.50% 6.28% 9.28% 10.92% 10.27% 16.03% Caribbean 1.05% 1.54% 2.13% 2.41% 2.40% 4.55% - ---------------------------------------------------------------------------------------------------------------------- Total 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% - ---------------------------------------------------------------------------------------------------------------------- TRADITIONAL DELIVERY SYSTEM - ---------------------------------------------------------------------------------------------------------------------- Banking Branches P.R 126 128 173 161 162 165 V.I 3 3 3 3 3 8 U.S 10 10 24 24 30 32 - ---------------------------------------------------------------------------------------------------------------------- Sub-total 139 141 200 188 195 205 - ---------------------------------------------------------------------------------------------------------------------- Popular Finance 17 17 26 26 26 26 Popular Leasing 4 9 9 9 8 Popular Leasing U.S.A Equity One 27 41 58 Popular Mortgage Popular Securities - ---------------------------------------------------------------------------------------------------------------------- Sub-total 17 21 35 62 76 92 - ---------------------------------------------------------------------------------------------------------------------- Total 156 162 235 250 271 297 - ---------------------------------------------------------------------------------------------------------------------- ELECTRONIC DELIVERY SYSTEM - ---------------------------------------------------------------------------------------------------------------------- ATMs Owned by Banco Popular P.R 153 151 211 206 211 234 Caribbean 3 3 3 3 3 8 U.S 6 11 - ---------------------------------------------------------------------------------------------------------------------- Sub-total 156 154 214 209 220 253 - ---------------------------------------------------------------------------------------------------------------------- Driven by Banco Popular P.R 68 65 54 73 81 86 Caribbean Sub-total 68 65 54 73 81 86 - ---------------------------------------------------------------------------------------------------------------------- Total 224 219 268 282 301 339 - ---------------------------------------------------------------------------------------------------------------------- TRANSACTIONS (in millions) - ---------------------------------------------------------------------------------------------------------------------- Electronic Transactions 14.9 16.1 18.0 23.9 28.6 33.2 Items Processed 159.8 161.9 164.0 166.1 170.4 171.8 - ---------------------------------------------------------------------------------------------------------------------- EMPLOYEES (FTEs)* 5,131 5,213 7,023 7,006 7,024 7,533 - ---------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------- 1994 1995 1996 1997 - ----------------------------------------------------------------------------------------- (Dollars in millions, except per common share data) - ----------------------------------------------------------------------------------------- SELECTED FINANCIAL INFORMATION - ----------------------------------------------------------------------------------------- Net Interest Income 535.5 584.2 681.3 $ 784.0 Non-Interest Income 141.3 173.3 205.5 247.6 Operating Expenses 447.8 486.8 541.9 636.9 Net Income 124.7 146.4 185.2 209.6 - ----------------------------------------------------------------------------------------- Total Assets 12,778.4 15,675.5 16,764.1 $ 19,300.5 Net Loans 7,781.3 8,677.5 9,779.0 11,376.6 Deposits 9,012.4 9,876.7 10,763.3 11,749.6 Total Stockholders' Equity 1,002.4 1,141.7 1,262.5 1,503.1 - ----------------------------------------------------------------------------------------- Market Capitalization 923.7 1,276.8 2,230.5 $ 3,350.3 ROA 1.02% 1.04% 1.14% 1.14% ROE 13.80% 14.22% 16.15% 15.83% - ----------------------------------------------------------------------------------------- PER COMMON SHARE - ----------------------------------------------------------------------------------------- Earnings 1.84 2.10 2.68 $ 3.00 Dividends (Declared) 0.50 0.58 0.69 0.80 Book Value 13.74 15.81 17.59 20.73 Market Price 14.07 19.38 33.75 49.50 - ----------------------------------------------------------------------------------------- ASSETS BY GEOGRAPHIC AREA - ----------------------------------------------------------------------------------------- P.R 75.86% 75.49% 73.88% 73.52% U.S 19.65% 20.76% 22.41% 23.92% Caribbean 4.49% 3.75% 3.71% 2.56% - ----------------------------------------------------------------------------------------- Total 100.00% 100.00% 100.00% 100.00% - ----------------------------------------------------------------------------------------- TRADITIONAL DELIVERY SYSTEM - ----------------------------------------------------------------------------------------- Banking Branches P.R 166 166 178 201 V.I 8 8 8 8 U.S 34 40 44 63 - ----------------------------------------------------------------------------------------- Sub-total 208 214 230 272 - ----------------------------------------------------------------------------------------- Popular Finance 28 31 39 44 Popular Leasing 10 9 8 10 Popular Leasing U.S.A 7 Equity One 73 91 102 117 Popular Mortgage 3 3 3 Popular Securities 1 2 - ----------------------------------------------------------------------------------------- Sub-total 111 134 154 183 - ----------------------------------------------------------------------------------------- Total 319 348 383 455 - ----------------------------------------------------------------------------------------- ELECTRONIC DELIVERY SYSTEM - ----------------------------------------------------------------------------------------- ATMs Owned by Banco Popular P.R 262 281 327 391 Caribbean 8 8 9 17 U.S 26 38 53 71 - ----------------------------------------------------------------------------------------- Sub-total 296 327 389 479 - ----------------------------------------------------------------------------------------- Driven by Banco Popular P.R 88 120 162 170 Caribbean 97 192 Sub-total 88 120 259 362 - ----------------------------------------------------------------------------------------- Total 384 447 648 841 - ----------------------------------------------------------------------------------------- TRANSACTIONS (IN MILLIONS) - ----------------------------------------------------------------------------------------- Electronic Transactions 43.0 56.6 78.0 111.2 Items Processed 174.5 175.0 173.7 171.9 - ----------------------------------------------------------------------------------------- EMPLOYEES (FTES)* 7,606 7,815 7,996 8,854 - -----------------------------------------------------------------------------------------
* For the years 1990-1997 seasonals are included converted FTEs. 5 8 Popular, Inc. 1997 Annual Report Our Creed Banco Popular is a local institution dedicating its efforts exclusively to the enhancement of the social and economic conditions in Puerto Rico and inspired by the most sound principles and fundamental practices of good banking. Banco Popular pledges its efforts and resources to the development of a banking service for Puerto Rico within strict commercial practices and so efficient that it could meet the requirements of the most progressive community of the world. These words, written by Don Rafael Carrion Pacheco, Executive Vice President and President (1927-1956), embody the philosophy of Banco Popular. Our People The men and women who work for our institution, from the highest executive to the employees who handle the most routine tasks, feel a special pride in serving our customers with care and dedication. All of them feel the personal satisfaction of belonging to the "Banco Popular Family," which fosters affection and understanding among its members, and which at the same time firmly complies with the highest moral and ethical standards of behavior. These words by Don Rafael Carrion Jr., President and Chairman of the Board (1956-1991) evidencing our commitment to human resources, were written to commemorate Banco Popular's 95th anniversary. 6 9 Letter to Shareholders [PHOTO] Mr. Richard L. Carrion Chairman, President and Chief Executive Officer To Our Shareholders During 1997 we continued to make progress toward achieving geographic and business diversification by capitalizing on the Corporation's leadership position and performance in Puerto Rico. Financial results for the year were solid and reflected the higher-than-expected growth rates in the economy of both Puerto Rico and the United States, as well as a low interest rate environment and stable prices. At year end, the Corporation reported net income of $209.6 million, a 13% increase, when compared to 1996. Earnings per common share, in turn, rose to $3.00, a 12% increase over the $2.68 obtained in 1996. Total assets grew considerably, from $16.8 billion to $19.3 billion. Return on common equity decreased slightly to 15.83% from the 16.15% reported for 1996, while return on assets remained at 1.14%. The financial markets responded positively to our accomplishments, and the Corporation's common stock price increased 47%, from $33.75 at the end of 1996 to $49.50. For the past five years, total return to our shareholders has been 29.94%, which exceeds both the S&P 500 Index and the S&P Banking Index. The renaming of the Corporation (previously BanPonce Corporation) to Popular, Inc., and of its subsidiaries to also include the Popular name, best exemplifies our efforts throughout the year. The Popular name is not only part of the company's heritage, but also describes the backbone of the Corporation's past, present and future business strategy. Popular, Inc. has grown from being the leading Puerto Rican banking institution to a financial services provider in Puerto Rico, the United States and the Caribbean Basin Region. This has been accomplished mainly by focusing the Corporation's strategy on initiatives to provide financial services to the mass market or "popular" segment of the markets it serves. The unified branding across the different businesses and geographic markets will increase the Corporation's name recognition and facilitate efforts to attract the U.S. Hispanic population, a market that is a natural extension of the existing franchise. Puerto Rico -- Our Strongest Pillar Popular, Inc.'s leadership position in Puerto Rico in terms of size, revenues and delivery system has provided a strong base from which to expand into other markets and businesses. The strategy focuses on serving all segments of the Puerto Rican market by maximizing the already existing infrastructure and offering more services, in more places, to more people. During 1997, Banco Popular continued to solidify its position in Puerto Rico with the integration of Roig Commercial Bank, a regional retail banking institution located in the Eastern region of Puerto Rico. With $900 million in assets and 25 branches, this acquisition expanded our retail network into six additional municipalities. The integration of this acquisition was completed in record time and was one of the smoothest Popular, Inc. has ever experienced. Nevertheless, we believe there is still opportunity for 7 10 Popular, Inc. 1997 Annual Report - -------------------------------------------------------------------------------- Social Responsibility: We are committed to work for the social and economic well-being of the communities we serve with particular regard for the lowest socioeconomic component of the population. - -------------------------------------------------------------------------------- improvements in terms of achieving additional efficiencies from the consolidation during 1998. To continue the transformation of the delivery system into sales- and service-oriented facilities, ten additional "in-store" branches were opened in retail businesses throughout the island in 1997. These smaller and more efficient facilities specialize in sales and providing customer service. As a result of the Roig Commercial Bank acquisition, which added 17 new branches after consolidating eight, and the new "in-stores", the banking network in Puerto Rico grew to a total of 201 locations at year end. The traditional banking network is well-matched by an electronic delivery platform that includes the ATH/POS Network, TeleBanco Popular and TelePrestamo to provide customers with added convenience and service. The ATH ("A Toda Hora" - - At All Times) automated teller network in Puerto Rico, an important component of this electronic platform, grew to a total of 391 machines. Enhancements to the ATH network throughout the year included touch-screen capability and the ability to make payments. The POS terminal grid grew 43% for a total of 16,321 POS terminals. At year end, more than 14,300 merchants were members of this network and transactions had grown 51%. TeleBanco, the telephone banking platform, extended its hours of operation to 24 hours a day, 365 days a year, has a new, easier-to-remember telephone number and expanded its services to include outbound telemarketing. TelePrestamo, a telephone alternative for retail loans, has also become a preferred channel for customers. By the end of 1997, approximately 40% of all individual credit applications were processed through this channel. As a result of these and other initiatives, for the first time in December we processed more electronic debit transactions at the point-of-sale than cash withdrawals at our ATH Network. Total electronic debit transactions for the month of December were 3.8 million compared with 3.5 million ATH cash withdrawals. We consider this to be a great accomplishment and the result of a well-orchestrated combination of strategies to transform Puerto Rico's payment system from paper-based to electronic transactions. To continue fostering electronic alternatives, we introduced two innovative products for different segments of the market: PC Banco, a computer banking alternative, and Envia ATH, an electronic money transferring service. PC Banco, aimed at the more technologically sophisticated segment, surpassed all of our projections. Envia ATH, on the other hand, is a first attempt to reach a portion of the unbanked segment of the population by providing a low-cost alternative to send money from Puerto Rico to the Dominican Republic. The success of this product presents an interesting opportunity for the U.S. and Central American markets, where a large percentage of the population performs this type of transaction. Electronic alternatives were also developed for commercial customers during 1997. The establishment of TeleBanco Comercial and Check Management are some examples of new electronic services available to meet the needs of commercial customers. TeleBanco Comercial provides customers with a telephone electronic alternative to obtain information and perform transactions. Check Management is a CD ROM imaging product for clients with 800 to 20,000 checks a month to facilitate account reconciliation. In addition to electronic alternatives for commercial customers, we continued to focus efforts on offering specialized programs to this segment. These programs are adding value to existing and potential customers with the objective of deepening these relationships or establishing new ones. For large family-owned businesses we continued an initiative that started in 1996: a management development program in coordination with the Wharton School of the University of Pennsylvania tailored to the specific problems of family-owned corporations. Special conferences tailored to meet the financial services needs of particular industries were also - -------------------------------------------------------------------------------- Focus on the Customer: Our customers are the lifeblood of our organization. We are an institution that values relationships more than transactions. The needs and satisfaction of our customers are our primary concern. - -------------------------------------------------------------------------------- 8 11 Letter to Shareholders - -------------------------------------------------------------------------------- Integrity: We are guided by the highest moral and ethical standards. The trust of our customers is essential for our existence. - -------------------------------------------------------------------------------- developed for small and middle market commercial customers during the year. Banco Popular's commitment to support the development of small businesses was once again evidenced by being one of the most active banking institutions in small business lending in the United States. In 1997, we also expanded our commercial lending services for large corporate clients with the addition of a Structured Finance Division. During its first year, the division participated in some of the most important commercial transactions in Puerto Rico, notably, the acquisition of a large retail chain by a local company, the financing of a merger between two food distribution corporations, and a large asset-based lending arrangement for a medical equipment distributor. As a result of these delivery system improvements, of enhancements and introduction of electronic alternatives and the development of initiatives for different segments of the market, the retail, individual lending and commercial businesses showed healthy growth in 1997. The retail business increased deposits by 16.3%, and the individual portfolio increased 15.6%. Commercial loans grew 21.3%; deposits, 12.3%; and service fees, 8.7%. Significant improvements were also achieved in customer satisfaction; our latest surveys show that 74% of retail customers and 80% of commercial customers reported to be extremely satisfied or satisfied with the service provided. In August, Banco Popular signed an important agreement to become the issuer of American Express cards in Puerto Rico and the Caribbean. This new credit card product will be introduced in 1998 and will provide an opportunity to strengthen the Bank's position in this highly competitive business as well as another opportunity for geographic diversification. Popular, Inc.'s banking business in Puerto Rico is complemented by Popular Home Mortgage, Popular Finance, Popular Leasing and Popular Securities, the Corporation's mortgage, consumer finance, leasing and securities subsidiaries in Puerto Rico. These operations also experienced growth and expanded their operations during 1997. Popular Home Mortgage improved its service with the implementation of a new and faster mortgage loan origination system. Popular Finance expanded its network with the addition of five new locations; its services now also include the sale of money orders and the receipt of payments. Popular Leasing experienced a 10% volume increase in 1997. Popular Securities also expanded its services by establishing retail investment services to complement the already existing institutional brokerage business. Previously, the Corporation offered limited brokerage services to customers through a third party provider. By providing these services through Popular Securities, retail customers have benefited from better service and additional investment opportunities. The U.S. Hispanic Market -- Our New Frontier Popular, Inc. expanded its presence in the United States considerably during 1997. Efforts throughout the year concentrated in establishing an integrated network to serve Hispanics and small and middle market businesses. The expansion introduced Popular, Inc. to Texas and Florida with the acquisition of Citizens National Bank and Seminole National Bank, respectively. Citizens Bank, with total assets of $50 million and one branch, marked Popular, Inc.'s entry into Houston. This market represents an interesting opportunity to provide financial services to this city's growing Hispanic population. Seminole National Bank with total assets of $26 million and three branches provided the entry into the attractive Orlando market where Banco Popular is well-known due to a large number of Puerto Ricans residing in this area. Through acquisitions and the establishment of "de-novo" operations, our U.S. banking franchise increased from 44 to 63 strategically positioned locations, all under the Banco Popular name. With the addition of the Florida and Texas markets, the Corporation fulfilled its goal of operating in the six states with the largest percentage of Hispanic population: New York, New Jersey, - -------------------------------------------------------------------------------- Passion for Excellence: We firmly believe in doing things the right way, the first time, every time. Continuous improvement and measurement of all our processes are essential for our success. - -------------------------------------------------------------------------------- 9 12 Popular, Inc. 1997 Annual Report - -------------------------------------------------------------------------------- Innovation: Constant innovation is a competitive advantage. We adopt new techniques in all business areas to anticipate the changing needs of our customers. - -------------------------------------------------------------------------------- Illinois, California, Texas and Florida. The high premiums commanded in these markets and the experiences learned from past acquisitions and "de-novo" establishments have shifted the Corporation's strategy to increasingly focus on "de-novo" operations as opposed to acquisitions. Establishing "de-novo" operations shows higher financial returns, particularly in markets where Banco Popular possesses brand awareness and recognition. The cornerstone of Popular, Inc.'s strategy to reach the Hispanic market was the launching of a national credit card program in September. Utilizing Don Francisco, a well-known Hispanic figure as spokesperson, in a national advertising campaign, this strategy aims at developing a customer base from which to expand into other financial products and services. In addition to the banking acquisitions and the launching of the national credit card campaign, the combination of complementing asset-generation strategies resulted in a 28% increase to $3.4 billion in total banking assets in the United States. These strategies mainly focused on expanding our capabilities and expertise in small business and franchise lending and the establishment of Popular Leasing, U.S.A. Our continued emphasis in small business lending through the Small Business Administration resulted in obtaining Preferred Lender status in New York, New Jersey, Illinois, Florida, Texas and California. In terms of franchise lending, special agreements were reached with Domino's and AFC, the corporation that manages Church's Fried Chicken, Popeye's and Cheseapeake Bagels. Popular Leasing, U.S.A., with headquarters in St. Louis, Missouri, focuses on leasing medical equipment. At year end it had grown to seven locations throughout the United States. Equity One, Popular, Inc.'s U.S. consumer finance subsidiary, continued to experience increased growth and performance. At year end this operation had 117 locations throughout 29 states. Equity One's name was not changed to include Popular due to its size, scope and strategy. This entity has a well-established brand across the markets it serves and is not exclusively focused on the Hispanic segment. The marked growth of our U.S. operations created the need for the strengthening of the national management team to provide operations, finance, human resources, credit risk management and business direction. On the retail banking side, this national management team is complemented by regional teams in New York/New Jersey, Texas, Florida, California and Illinois. The Caribbean Basin Region -- The Expansion of our Electronic Highway The Caribbean and Latin America expansion strategy has focused on providing electronic processing services in the region. The Caribbean Basin region, with more than 111 million inhabitants, mostly young and underserved in terms of financial services, provides an attractive growth market for Popular, Inc. ATH Dominicana, the automated teller machine and POS network established in partnership with local banks and service providers in the Dominican Republic, experienced dramatic growth. At year end, the network connected seven banks, 233 machines and was processing more than 1 million transactions for the month of December for an 87% increase over 1996. The POS network also expanded considerably to over 1,300 terminals in 789 commercial establishments at year end. This growth was driven by a locally produced TV campaign to develop awareness of the network and stress the convenience of electronic alternatives. Reliability of the network is up to 92% since Popular, Inc. began processing its transactions. In June 1997, the ATH network was expanded to Costa Rica. By year end, the network connected three banks and over 18 ATMs throughout the country. An additional seven private banks had joined the network and negotiations were well under way with the three major state-owned commercial banks. During 1997, Popular, Inc. reached an agreement with Banco - -------------------------------------------------------------------------------- Our People: We strive to recruit, train and retain the most qualified people. We believe in a direct relation between our employees' compensation and their commitment to the organization's objectives, their individual performance, their team's performance and the Corporation's. - -------------------------------------------------------------------------------- 10 13 Letter to Shareholders - -------------------------------------------------------------------------------- Shareholder Value: Our goal is to produce above-average and consistent financial returns for our shareholders. Our decisions are based on a long-term view of the future and are characterized by prudence in assuming risk. - -------------------------------------------------------------------------------- Centroamericano de Integracion Economica (BCIE), a regional government-owned development bank headquartered in Honduras, to provide the processing platform to develop a Central American electronic highway based on chip card technology. This project has been modeled after similar efforts conducted in Spain by the Confederacion Espanola de Cajas de Ahorro (CECA). The project is expected to launch a pilot program in Costa Rica during 1998 and should be extended to other countries in the region by the year 2000. The Corporation's geographic diversification ventures are subject to continued reconsideration and review whenever our investments fail to yield the expected returns. For this reason, a little more than a year after the acquisition of 20% of Citizens Bank common stock, in Jamaica, we reexamined our strategy and chose to divest this investment. The island has experienced an acute economic crisis that has significantly affected the banking industry. The Corporation is currently negotiating with the Jamaican government, to agree on the conditions under which Popular, Inc. would consider reinvesting in Citizens Bank, Ltd. or any other Jamaican financial institution. Organizational Quality Responsible for all of these achievements is a group of 8,854 employees who labored long and hard for the accomplishment of these objectives. Recognizing their contribution and to ensure that their skills and abilities are up to par with the challenges the Corporation faces, we invested significantly in their development. During 1997, the Corporation provided more than 150,000 hours of training, an expense equal to 3.4% of total salaries and wages. Supporting our strategic objectives, 36% of these hours concentrated in sales and service training and management skill development. Other important components of the training curriculum included credit, operations, technology and individual development skills. Responding to the complexities brought upon by business and geographic diversification, we created the Risk Management Group. Mr. Carlos J. Vazquez, who joined Popular, Inc. during 1997, heads this new group, which includes the Credit Risk Management, Operational Risk Management, Auditing and Compliance divisions. Mr. Vazquez has more than 15 years of experience in commercial and investment banking. At the end of 1997 and under the leadership of the Risk Management and Operations groups, the Corporation heightened its awareness and actions to achieve Year 2000 compliance. A Year 2000 Corporate Effort has been put into effect and a dedicated group was established to ensure that the Corporation meets the deadlines imposed by the regulatory agencies. This effort is our topmost priority and will require considerable time and resources during the next two years. After reaching the mandatory retirement age, Mr. Jose E. Rossi and Mr. Emilio Jose Venegas retired from the Board of Directors of Popular, Inc., while Mr. Franklin A. Mathias retired from the Board of Directors of Banco Popular. Mr. Francisco Perez also retired from the Board of Popular, Inc. to pursue private business interests. To all of them we extend our appreciation and gratitude for their contributions throughout the years. We also welcomed Mr. J. Adalberto Roig to the Boards of Directors of Popular, Inc. and Banco Popular. Mr. Roig was Chief Executive Officer and Chairman of the Board of Roig Commercial Bank. To preserve the principles that have guided us throughout the past 104 years as we embark into new markets and businesses, during 1997 we formally enunciated Popular, Inc.'s corporate values, which are included as part of this letter. We are committed to these principles as we reflect on our past success and look to the future. We continue on the right course. /s/ Richard L. Carrion Richard L. Carrion Chairman President Chief Executive Officer 11 14 [PHOTO] A man and little girl buying flowers on the street 12 15 Puerto Rico Strategy "My family and business are in Puerto Rico... all my finances are managed by Popular, Inc." In Puerto Rico, the Corporation's strategy is to satisfy the financial needs of all segments of the market, from the unbanked individual to the largest corporate customer. Armed with the most extensive traditional and electronic delivery network, the Corporation is well-poised to achieve this goal. The Corporation anticipates all of its individual customers' financial needs with products such as savings, deposits, investment services, credit cards, personal loans, mortgages, financial planning and electronic services. For commercial customers, the Corporation offers deposits, cash management, commercial loans, structured finance services and processing services to small, middle and large commercial customers. Market Highlights - - Popular, Inc. has the largest financial services network in Puerto Rico with 201 banking outlets and 59 non-banking offices. - - In Puerto Rico, Banco Popular is the leading market player in almost all banking lines of business. - - Banco Popular maintains the largest electronic delivery platform in Puerto Rico with 391 ATM machines and 16,321 POS terminals located in more than 14,300 businesses. 13 16 Popular, Inc. 1997 Annual Report "The strategy is to satisfy the financial needs... [PHOTO] Customer taking advantage of a POS network The POS network: One of the many advantages for consumers and merchants The POS network has experienced extraordinary growth since it was established in 1993. At present, it is composed of more than 16,300 terminals in more than 14,300 businesses. Within POS transactions, debit exchanges are growing at a faster rate than credit. In 1997, debit transactions constituted approximately 77% of total POS transactions, and 36% of total monetary exchanges. The widespread acceptance of the POS network as a preferred payment system is owed to the benefits it confers to both individual and commercial customers. Advantages for the consumer include, not having to carry cash, saving the time spent writing checks, obtaining check approval and reducing trips to the ATM machine. For businesses, the POS system reduces check processing expenses as well as the risks and costs associated with returned checks. It also improves businesses' cash flow as it provides for rapid funds availability. In addition to the POS system, Banco Popular offers a large selection of customized products and services to meet the specialized needs of local businesses and stateside companies. Cash management services, payroll processing, direct deposit for employees, electronic banking and check imaging are just some of the many electronic products and services for commercial customers. TRANSACTIONS IN PUERTO RICO (percentage) 1992 [ ] Teller 73% [ ] Electronic 27% (GRAPH) 1997 [ ] Teller 33% [ ] Electronic 67% (GRAPH) 14 17 Puerto Rico Strategy [PHOTOS] Top management in inauguration process of a Branch as a result of Acquisition of Roig Commercial Bank Successful integration of Roig Commercial Bank Akin with strengthening the Corporation's leadership position in Puerto Rico, the merger with Roig Commercial Bank provided Banco Popular with increased presence in the island's Eastern region, where new tourist and industrial developments have surged. Moreover, the merger combined two institutions with strong local traditions and commitment to the well-being of the Puerto Rican community, qualities that facilitated the union. A multidisciplinary group of personnel from both institutions representing human resources, operations, information technology, credit and retail banking was organized to develop and implement an integration plan. In spite of the complexities involved in consolidating a wide array of products, applications, systems and human resources, the conversion was completed smoothly in less than three months. ...of all segments of the market." Banco Popular-Wharton Family Business Program Recognizing the essential contribution of family-owned businesses to Puerto Rico's economic development, Banco Popular -- in conjunction with the Wharton School's Family-Controlled Corporation Program -- instituted a comprehensive educational program that helps these enterprises face the challenges of an increasingly competitive environment. Through this program, Banco Popular provides the family business community the opportunity to attend seminars offered by distinguished Wharton School professors specialized in issues common to the family enterprise. The most recent project, known as Banco Popular-Wharton Family Corporation LEADS Project, integrates research, education and consulting methods to create a customized learning experience for these family-owned businesses. The project constitutes a new learning model that will enhance competitiveness in these enterprises as well as provide valuable information on the impact of family businesses in the economic development of Puerto Rico. 15 18 Popular, Inc. 1997 Annual Report ..."from the unbanked individual... [PHOTO] Customer making a Banking Transaction by Phone Offering more electronic alternatives Banco Popular continues to offer convenient electronic alternatives to serve the financial needs of all market segments. With the launching of PC Banco in April 1997, the Bank became the pioneer of PC home banking services in Puerto Rico. In August, Banco Popular introduced an inexpensive wire transfer service, ENVIA ATH, that allows customers to send funds to their relatives in the Dominican Republic through the ATM network. The Bank also expanded its telephone banking capabilities through enhancements to TeleBanco. A new telephone number, 724-365_, the last digit corresponding to the different services offered was aimed at speeding customers' access to desired transactions. In addition, TeleBanco's menu was modified to facilitate and encourage the use of the VRU (voice response unit). As a result, the total number of calls handled by the VRU increased from 52% in 1996 to 65% in 1997. As part of TeleBanco, a new outbound telemarketing program was established in June 1997. In just six months, this outbound group sold a total of $10.4 million in loans and long-term deposits and opened a total of 947 deposit accounts. Transactions through TelePago, Banco Popular's telephone payment services, experienced a 47% growth over the course of 1997. Efficient and responsive individual credit platform Over the past two years, an automated credit application processing system (ACAPS) for branch lending and credit cards was implemented. In addition to being a paperless application system, it laser prints all needed forms and electronically interfaces with the servicing system and central file. Concurrently, the processing and credit decision functions were centralized as a rapid credit decision support unit for branches, with most replies in two to five minutes. This has reduced the average loan application taking, processing and decision time from two days to 35 minutes. A loan-by-phone unit (TelePrestamo) was staffed with credit officers, and provides a credit decision to the caller during the first call (average 21 minutes). In July 1997, the installation of ACAPS for automobile and indirect contracts was completed, with a rapid central credit decision unit. [PHOTO] An employee attending a customer on credit platform 16 19 Puerto Rico Strategy ...to the largest corporate customer." [PHOTO] An employee offering to individual customers a variety of investment services. Enhanced retail investment services Popular Securities Incorporated, previously BP Capital Markets, Inc., expanded its institutional business through the establishment of a retail division. Popular Securities' retail division offers individual customers a variety of investment alternatives such as mutual funds, stocks, federal and local bonds, mortgage-backed securities such as GNMAs and others. Fifteen representatives from Popular Securities serve Banco Popular's branch customers islandwide and 14 additional licensed officers serve Banco Popular's private banking customers. At year end, Popular Securities had 6,400 institutional and retail customers and provided underwriting and investment banking services to corporate and government issuers in 17 financing transactions, totaling approximately $4.8 billion. Distribution of Assets by Geographic Areas (percentage) [GRAPH] [GRAPH] 87% Puerto Rico 73% Puerto Rico 13% Other 27% Other Diversification of financial services Popular Finance, Inc., Banco Popular's consumer finance subsidiary, opened four new personal loan branches, for a total of 39, and another second mortgage branch for a total of five. The relatively new second mortgage business grew 169% during 1997. Popular Finance also developed an advertising campaign to promote new services, namely, money orders and bill payment services at all of its branches. In addition to the consumer finance business, the Bank's mortgage subsidiary, Popular Mortgage, Inc., experienced a 40% growth in originations. Popular Leasing & Rental, Inc., the Bank's leasing subsidiary, opened two additional branches and increased its volume by 10%, in spite of a general reduction in auto sales. Including Popular Securities, combined non-banking assets from all subsidiaries amounted to 11% of total assets located in Puerto Rico. [PHOTO] (GRAPH) (GRAPH) A family enjoying the scene through a window of a wooden built house 17 20 [PHOTO] A man making a phone call on the street 21 United States Strategy "My business is in Chicago... I do all my banking with Banco Popular." During 1997, Popular, Inc. continued to implement its twofold U.S. mainland expansion strategy -- servicing the financial needs of the Hispanic community and targeting small and middle market business niches with specialized lending programs. The Corporation expanded its banking network to states with large Hispanic communities; established a national credit card operation; incorporated Popular Leasing, U.S.A. to focus on the leasing of mostly medical equipment and commercial products and expanded SBA and franchise lending to new territories. Meanwhile, its consumer finance subsidiary, Equity One, continued to grow while achieving excellent returns. Market Highlights - - Banco Popular is the largest Hispanic bank in the United States with branches in New York, Illinois, New Jersey, California, Florida and Texas. - - Popular, Inc.'s U.S. banking and non-banking operations cover 33 states. - - Banco Popular has been a leader in SBA lending for the last five years. 19 22 Popular, Inc. 1997 Annual Report [PHOTO] In-Store Branch Expansion of the retail network In 1997, Banco Popular in the United States expanded the number of branches from 44 to 63. The Corporation entered into two additional states through acquisitions and branch openings in Orlando, Florida, with six new branches, and the acquisition of Citizens Bank in Houston, Texas, with one branch. During 1997, it significantly expanded its presence in Chicago with eight additional branches, totaling 13 branches and over $1 billion in assets. In Los Angeles, Banco Popular established one additional branch and reached out to the Hispanic community by establishing the first in-store branch in a Hispanic-owned supermarket chain, Liborio Markets. In New Jersey, an additional in-store branch was established in Shop-Rite, a major supermarket chain. Popular, Inc., currently has branches in the six major Hispanic markets of the U.S.: New York, New Jersey, Chicago, Los Angeles, Houston and Orlando. [GRAPH] 1988 10 1989 10 1990 24 1991 51 1992 71 1993 90 1994 107 1995 131 1996 146 1997 187 ..."servicing the financial needs of the Hispanic community... New national credit card business As part of its strategy to provide financial services to the Hispanic community in the United States, during 1997, the Corporation established a national credit card program. Along with this effort, a national marketing campaign was launched, featuring the host of one of the most popular Hispanic TV programs, Don Francisco, as spokesperson. Credit cards are offered through TV advertising as well as direct strategies such as direct mailings. The program also offers a secured card for those lacking a credit history. Special offers tailored to the Hispanic segment include prepaid calling cards and discount certificates at Western Union and Kmart prescription drug departments. As of December 31, 1997, the Bank approved 15,635 credit card accounts. [PHOTO] A hand showing a Visa Credit Card of Banco Popular 20 23 United States Strategy ...targeting small and middle market business niches." National SBA and franchise lending programs Over the years, Banco Popular has been one of the leading SBA lenders in the U.S. The experience acquired in this field has fueled the expansion into Florida, Texas, Illinois and California, where the Bank has obtained Preferred Lender status. Banco Popular centralized the processing and underwriting of all loans under $250,000 in Orlando in an effort to increase the efficiency of the operation. In addition, Banco Popular continued expanding its franchise lending services in 1997. More than $97 million were lent to franchise owners of McDonald's, Pizza Hut, Burger King, Domino's Pizza and Dunkin' Donuts, among others. These two national business lines offer significant diversification opportunities. [PHOTO] A little boy eating a Hamburger [PHOTO] A screen showing a radiography New leasing subsidiary Popular Leasing, U.S.A. was established in January 1997 as a subsidiary of Banco Popular, Illinois. Through seven sales offices, it leases medical equipment, computers, point-of-sale systems, ATM machines and some automotive repair and machining equipment. At year end, Popular Leasing's portfolio had grown to over $13.5 million, corresponding to 900 active leases spreading across 45 different states. [GRAPH] Total U.S. Assets (millions) 1988 311 1989 372 1990 834 1991 950 1992 1,027 1993 1,846 1994 2,511 1995 3,254 1996 3,757 1997 4,616 Growing consumer financial services Equity One, Inc., the Corporation's consumer finance subsidiary in the United States, operates a 117 branch network in 29 states. In 1997, this operation expanded to Nebraska and Nevada and reported an increase in revenues of 31% over the previous year. Loans surpassed the $1 billion mark. The sale of loans during the year generated over $388 million and customer accounts reached 102,000. Equity One participated as a direct lender for the Pennsylvania and New Jersey Housing and Finance Agencies, providing loans for inner city, lower income individuals and assisting buyers with down payments and subsidized closing costs. In addition, Equity One became an approved direct lender for the Farmers Home Loan Mortgage program, which provides financing for the purchase of qualified rural and farm properties. 21 24 [PHOTO] Lady Shopping with ATH credit card 25 Caribbean & Latin America Strategy "While shopping in the Caribbean... I use my ATH card." Banco Popular has had a long-standing banking presence in the British and U.S. Virgin Islands. More recently, the Corporation's strategy in this region focuses on using the electronic capabilities and expertise developed in Puerto Rico to establish ATM and POS networks in other Caribbean and Latin American countries. Popular, Inc. operates ATM networks in Costa Rica and the Dominican Republic under the ATH brand. The Corporation is expanding these services to other countries, with projects to transform the payment system in this region from a cash-based society to one in which electronic transactions are common. Market Highlights - - Banco Popular is the leader in total deposit market share in the U.S. Virgin Islands. - - ATH Dominicana is the largest ATM network in the Dominican Republic with seven banks connected and 233 driven ATM machines. 23 26 Popular, Inc. 1997 Annual Report ..."complementing a long-standing banking presence." [PHOTO] View of British Virgin Islands Bay Retail operations in the Virgin Islands Amid decreased economic activity caused by severe hurricanes in 1995 and 1996, Banco Popular's Virgin Islands operations recovered in 1997, with the renewed surge in tourism. The growth potential that Banco Popular anticipates in this region is evidenced by the ground-breaking ceremony in 1997 for the new Popular Center building in St. Thomas. This well-located 40,000 square foot building will house the home office, main branch and all credit and service departments. ATH International Network Growth in the Caribbean Basin Region ATM Machines 102 251 Transactions 666 1,057 24 27 Caribbean & Latin America Strategy [PHOTO] Woman makes a withdrawal on ATH networks Expansion of the ATH network The ATH Dominicana operation is rapidly gaining wide public acceptance with the support of a local advertising campaign, emphasizing the convenience of electronic services. The network experienced a very successful second year with the joining of Banco de la Reserva, the largest state-owned retail bank in the country. With the addition of more than 64,000 cardholders, and the unprecedented growth in transactions processed, ATH Dominicana has become the primary ATM and POS network in the Dominican Republic. The expansion of the ATH network reached Central America in mid-1997 with the creation of ATH Costa Rica. By year end the network included among its members three of the country's main private banks, over 18 ATMs and the Corporation was in the process of negotiating with the state-owned commercial banking sector. ..."with processing services by using electronic capabilities and expertise." [PHOTO] An employee giving electronic support Technology infrastructure to support the expansion Significant investment in telecommunications equipment, computer information technology and human resources has turned the Cupey processing unit into a state-of-the-art center from which the Corporation operates the Puerto Rico, Dominican Republic and the Costa Rica ATH processing networks. Plans are in the works to expand its services to other institutions in Puerto Rico and the Caribbean Basin region. Central American electronic highway ATH Costa Rica was chosen by the Banco Centroamericano de Integracion Economica, a regional government-owned development bank, to provide the processing platform for its Futura 3000 project, an electronic highway that will link Central America from Costa Rica to Guatemala. The project will provide Popular, Inc. with an opportunity to become involved with a proven chip-card technology platform. 25 28 [PHOTO] Children giving food to the birds "Children need to grow in a healthy community...Popular, Inc. contributes to make it happen." The Corporation has a tradition of supporting and enriching the communities where it does business. Its Banco Popular Foundation supports groups that effectively face Puerto Rico's most pressing social concerns. A generous donation program at the Bank contributes to education, the arts and sports, in all of its markets. A very strong community reinvestment program advocates the development of self-help initiatives and actively advises and counsels community groups, promoting networking among them. For the community as whole, the Bank organizes thought-provoking exhibits at the Rafael Carrion Pacheco Exhibition Hall in its Old San Juan building. 26 29 Community Involvement [GRAPH] [ ] Community 38% [ ] Cultural 11% [ ] Educational 28% [ ] Caribbean 1% [ ] Sports 10% [ ] U.S. 11% Strong community initiatives Most of the Bank's donations are distributed among community initiatives and educational programs. The Banco Popular Foundation made it possible to transform the Jane Stern Dorado Community Library into a civic gathering place for youth and other residents of the area. An average of 3,000 students visit the center monthly to take advantage of its welcoming atmosphere, its best-seller books, study halls and computer center. This library is a good example of the type of institution the Foundation supports. Other examples are Juan Domingo en Accion, initially a library project that has blossomed into several self-help community initiatives working in a distressed urban area, and the Amigos de Culebra, a start-up community project designed to improve literacy among children in the island municipality of Culebra. [PHOTO] Lady looking at the 1997 art exhibition of Jack Delano [PHOTO] Child and Old man Our Jack: The Art of Jack Delano The 1997 exhibition Our Jack: The Art of Jack Delano, which opened in October, is dedicated to this Renaissance man, born in Russia, who chose to make Puerto Rico his home after being sent here by the Roosevelt Administration to chronicle the country's social conditions in the '40s. Jack was a highly praised photographer, composer, film maker, illustrator and author. The exhibit, organized in conjunction with the Smithsonian Institution Traveling Exhibition Service, will travel to eight U.S. cities, including the popular National Museum of American History, in Washington, D.C., an institution visited by 15 million people each year. [PHOTO] Bobby Capo's Photo Siempre Piel Canela Our fifth annual TV music special, highlighting some of the best popular music in Puerto Rico, focused on the music of Bobby Capo, a popular '50s crooner and composer. A stellar cast of over 30 popular entertainers participated in the production that was broadcast simultaneously in Puerto Rico through all major TV stations, and in New York, Orlando, Chicago, Tampa, Houston and Los Angeles through Telemundo, a Hispanic TV network. Two of the songs included in the musical became hits in Puerto Rico radio stations. [PHOTO] Video Cassette, Compact Disc and Cassette of annual music special 27 30 Senior Management Council Senior Management Council Seated, far right: Richard L. Carrion Chairman President Chief Executive Officer Seated, from the left: Maria Isabel P. de Burckhart Executive Vice President Emilio E. Pinero Ferrer, Esq. Executive Vice President Humberto Martin Executive Vice President Carlos J. Vazquez Executive Vice President Jorge A. Junquera Senior Executive Vice President Standing, from the left: Roberto R. Herencia Executive Vice President Carlos Rom Jr. Executive Vice President Larry B. Kesler Executive Vice President David H. Chafey Jr. Senior Executive Vice President [PHOTO] Senior Management Group 28 31 Boards of Directors Boards of Directors Popular, Inc. Richard L. Carrion Chairman President Chief Executive Officer Alfonso F. Ballester Vice Chairman of the Board President Ballester Hermanos, Inc. Antonio Luis Ferre Vice Chairman of the Board President El Nuevo Dia Salustiano Alvarez Mendez President and Director Mendez & Company, Inc. Juan J. Bermudez Partner Bermudez & Longo, S.E. Francisco J. Carreras Educator Executive Director Fundacion Angel Ramos, Inc. David H. Chafey Jr. Senior Executive Vice President Popular, Inc. and Banco Popular de Puerto Rico Luis E. Dubon Jr., Esq. Partner Dubon & Dubon Hector R. Gonzalez President Chief Executive Officer TPC Communications of PR, Inc. Jorge A. Junquera Senior Executive Vice President Popular, Inc. and Banco Popular de Puerto Rico Manuel Morales Jr. President Parkview Realty, Inc. Alberto M. Paracchini Private Investor Francisco M. Rexach Jr. President Capital Assets, Inc. J. Adalberto Roig Jr. Chairman Antonio Roig Sucesores, Inc. Felix J. Serralles Nevares President Chief Executive Officer Destileria Serralles, Inc. Julio E. Vizcarrondo Jr. President Chief Executive Officer Desarrollos Metropolitanos, Inc. Samuel T. Cespedes, Esq. Secretary Board of Directors Brunilda Santos de Alvarez, Esq. Assistant Secretary Board of Directors Ramon D. Lloveras San Miguel, Esq. Assistant Secretary Board of Directors Ernesto N. Mayoral, Esq. Assistant Secretary Board of Directors Banco Popular de Puerto Rico Richard L. Carrion Chairman President Chief Executive Officer Alfonso F. Ballester Vice Chairman of the Board President Ballester Hermanos, Inc. Antonio Luis Ferre Vice Chairman of the Board President El Nuevo Dia Juan A. Albors Hernandez Chairman Chief Executive Officer Albors Development Corp. Jose A. Bechara Bravo President Empresas Bechara Inc. Juan J. Bermudez Partner Bermudez & Longo, S.E. Esteban D. Bird President Chief Executive Officer Bird Construction Company, Inc. Francisco J. Carreras Educator Executive Director Fundacion Angel Ramos, Inc. David H. Chafey Jr. Senior Executive Vice President Popular, Inc. and Banco Popular de Puerto Rico Luis E. Dubon Jr., Esq. Partner Dubon & Dubon Hector R. Gonzalez President Chief Executive Officer TPC Communications of PR, Inc. Jorge A. Junquera Senior Executive Vice President Popular, Inc. and Banco Popular de Puerto Rico Manuel Morales Jr. President Parkview Realty, Inc. Alberto M. Paracchini Private Investor Francisco M. Rexach Jr. President Capital Assets, Inc. J. Adalberto Roig Jr. Chairman Antonio Roig Sucesores, Inc. Felix J. Serralles Nevares President Chief Executive Officer Destileria Serralles, Inc. Julio E. Vizcarrondo Jr. President Chief Executive Officer Desarrollos Metropolitanos, Inc. Samuel T. Cespedes, Esq. Secretary Board of Directors Brunilda Santos de Alvarez, Esq. Assistant Secretary Board of Directors Ramon D. Lloveras San Miguel, Esq. Assistant Secretary Board of Directors Ernesto N. Mayoral, Esq. Assistant Secretary Board of Directors 29 32 Management Management Senior Management Council POPULAR, INC. AND BANCO POPULAR DE PUERTO RICO Richard L. Carrion Chairman President Chief Executive Officer David H. Chafey Jr. Senior Executive Vice President Jorge A. Junquera Senior Executive Vice President Maria Isabel P. de Burckhart Executive Vice President Roberto R. Herencia Executive Vice President Larry B. Kesler Executive Vice President Humberto Martin Executive Vice President Emilio E. Pinero Ferrer, Esq. Executive Vice President Carlos Rom Jr. Executive Vice President Carlos J. Vazquez Executive Vice President Office of the President Tere Loubriel Senior Vice President Year 2000 Office Brunilda Santos de Alvarez, Esq. Senior Vice President General Counsel Ramon D. Lloveras San Miguel, Esq. Vice President Legal Division Retail Banking Group David H. Chafey Jr. Senior Executive Vice President Jorge Biaggi Senior Vice President Hato Rey Region Francisco Cestero Senior Vice President Caguas Region Norman Irizarry Senior Vice President Western Region Felix M. Leon Senior Vice President Eastern Region Carlos J. Mangual Senior Vice President Ponce Region Wilbert Medina Senior Vice President Bayamon Region Maritza Mendez Senior Vice President San Juan Region Miguel Ripoll Senior Vice President Rio Piedras Region Eli Sepulveda Jr. Senior Vice President Arecibo/Manati Region Juan Guerrero Senior Vice President Financial and Investment Services Nestor O. Rivera Senior Vice President Retail Banking Lizzie Rosso Senior Vice President Alternative Delivery Channels Retail Credit Group Larry B. Kesler Executive Vice President Jorge J. Besosa Senior Vice President Individual Lending Felipe Franco Senior Vice President Mortgage Loans Valentino I. McBean Senior Vice President Virgin Islands Region Commercial Banking Group Emilio E. Pinero Ferrer, Esq. Executive Vice President Maria Fuentes Senior Vice President Structured Finance Arnaldo Soto Couto Senior Vice President Construction Loans Cynthia Toro Senior Vice President Business Banking Ricardo Toro Senior Vice President Corporate Banking Financial Management Group Jorge A. Junquera Senior Executive Vice President Richard Barrios Senior Vice President Investments Luis R. Cintron, Esq. Senior Vice President Trust Amilcar L. Jordan, Esq. Senior Vice President Comptroller Ivan Pagan Senior Vice President Mergers and Acquisitions CARIBBEAN REGION Carlos Rom Jr. Executive Vice President Caribbean and Latin America Expansion UNITED STATES OPERATIONS Roberto R. Herencia Executive Vice President U.S. Expansion Orlando Berges Senior Vice President U.S. Finance and Operations L. Gene Beube Senior Credit Officer U.S. Risk Management Donald R. Simanoff General Manager U.S. Cards Division Richard F. Demerjian President Banco Popular, N.A. (California) Mercedes McCall President Banco Popular, N.A. (Florida) S. Michael Polanski President Banco Popular, Illinois Jose Antonio Torres Region Head, Vice President New York / New Jersey Javier Ubarri President Banco Popular, N.A. (Texas) Administration Group Maria Isabel P. de Burckhart Executive Vice President Luis F. Rodriguez Villamil Senior Vice President Marketing Luz M. Tous de Torres Senior Vice President Corporate Real Estate Ginoris Lopez-Lay Vice President Strategic Planning Evelyn Vega Sella Vice President Public Relations and Communications Human Resources Operations Group Humberto Martin Executive Vice President Segundo Bernier Senior Vice President Operations Victor V. Echevarria Senior Vice President Information Technology Eduardo Figueroa Senior Vice President Electronic Banking Plinio Rodriguez Senior Vice President Security Risk Management Group Carlos J. Vazquez Executive Vice President Felix Villamil Senior Vice President Credit Risk Management Jesus Aldarondo Vice President Operational Risk Management Jose A. Mendez Vice President Auditing Division Dianna Soler, Esq. Vice President Corporate Compliance Other Subsidiaries Equity One, Inc. Thomas J. Fitzpatrick President Popular Cash Express, Inc. Jerome Gagerman President Popular Finance, Inc. Edgardo Novoa President Popular Leasing & Rental, Inc. Andres F. Morrell President Popular Leasing, U.S.A. Bruce D. Horton President Popular Mortgage, Inc. d/b/a Popular Home Mortgage, Inc. Churchill G. Carey Jr. President Popular Securities, Incorporated Kenneth W. McGrath President 30 33 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF - --- THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the Fiscal Year Ended December 31, 1997 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF - --- THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) Commission File No. 0-13818 POPULAR, INC. Incorporated in the Commonwealth of Puerto Rico IRS Employer Identification No. 66-0416582 Principal Executive Offices: 209 Munoz Rivera Avenue Hato Rey, Puerto Rico 00918 Telephone Number: (809) 765-9800 - -------------------------------------------------------------------------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock ($6.00 par value) 8.35% Non-Cumulative Monthly Income Preferred Stock, 1994 Series A (Liquidation Preference $25.00 Per Share) Series A Participating Cumulative Preferred Stock Purchase Rights Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] --------------------------------------------- As of February 27, 1998 the Corporation had 67,717,548 shares of common stock outstanding. The aggregate market value of the common stock held by non-affiliates of the Corporation was $3,540,273,000 based upon the reported closing price of $52.28 on the NASDAQ National Market System on that date. DOCUMENTS INCORPORATED BY REFERENCE (1) Portions of the Corporation's Annual Report to Shareholders for the fiscal year ended December 31, 1997 are incorporated herein by reference in response to Item 1 of Part I. (2) Portions of the Corporation's Proxy Statement relating to the 1998 Annual Meeting of Stockholders of the Corporation are incorporated herein by reference to Items 10 through 13 of Part III. 34 TABLE OF CONTENTS
Page ---- PART I Item 1 Business.................................................... 3 Item 2 Properties.................................................. 11 Item 3 Legal Proceedings........................................... 11 Item 4 Submission of Matters to a Vote of Security Holders......... 12 PART II Item 5 Market for Registrant's Common Stock and Related Stockholder Matters...................................... 12 Item 6 Selected Financial Data .................................... 13 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 13 Item 7A Quantitative and Qualitative Disclosures About Market Risk.. 14 Item 8 Financial Statements and Supplementary Data ............... 14 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ..................... 14 PART III Item 10 Directors and Executive Officers of the Registrant ......... 14 Item 11 Executive Compensation ..................................... 14 Item 12 Security Ownership of Certain Beneficial Owners and Management .......................................... 14 Item 13 Certain Relationships and Related Transactions ............. 14 PART IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K .................................... 15
2 35 PART I POPULAR, INC. ITEM 1 BUSINESS Popular, Inc. (formerly BanPonce Corporation) (the "Corporation") is a diversified, publicly owned bank holding company, registered under the Bank Holding Company Act of 1956, as amended (the "BHC Act") and, accordingly, subject to the supervision and regulation of the Board of Governors of the Federal Reserve System ("the Federal Reserve Board"). The Corporation was incorporated in 1984 under the laws of the Commonwealth of Puerto Rico and is the largest financial institution in Puerto Rico, with consolidated assets of $19.3 billion, total deposits of $11.7 billion and stockholders' equity of $1.5 billion at December 31, 1997. Based on total assets at June 30, 1997, the Corporation was the 44th largest bank holding company in the United States. At the Corporation's annual meeting of shareholders held on April 25, 1997, the Corporation's shareholders approved a proposal made by the Board of Directors to change the name of BanPonce Corporation to Popular, Inc. The Corporation's principal subsidiary, Banco Popular de Puerto Rico ("Banco Popular" or the "Bank"), was incorporated over 100 years ago in 1893 and is Puerto Rico's largest bank with total assets of $16.0 billion, deposits of $10.6 billion and stockholders' equity of $1.3 billion at December 31, 1997. The Bank, on a consolidated basis, accounted for 83% of the total consolidated assets of the Corporation at December 31, 1997. A consumer-oriented bank, Banco Popular has the largest retail franchise in Puerto Rico, operating 201 branches and 391 automated teller machines. The Bank also has the largest trust operation in Puerto Rico and is the largest servicer of mortgage loans for investors. In addition, it operates the largest Hispanic bank branch network in the mainland United States with 29 branches in New York and an agency in Chicago. As of December 31, 1997, these branches had a total of approximately $1.5 billion in deposits. The Bank also operates seven branches in the U.S. Virgin Islands and one branch in the British Virgin Islands. Banco Popular's deposits are insured by the Federal Deposit Insurance Corporation (the "FDIC"). On June 30, 1997, the Corporation completed the acquisition and merger of Roig Commercial Bank ("RCB") with and into Banco Popular. RCB operated 25 branches, mainly located in the eastern part of Puerto Rico, with assets of $791 million and deposits of $584 million as of June 30, 1997. Banco Popular has three subsidiaries, Popular Leasing & Rental, Inc., Puerto Rico's largest vehicle leasing and daily rental company, Popular Finance, Inc., (formerly Popular Consumer Services, Inc.), a small-loan and second mortgage company with 39 offices in Puerto Rico operating under the name of Popular Finance, and Popular Mortgage, Inc., a mortgage loan company with four offices in Puerto Rico operating under the name of Popular Home Mortgage (formerly Puerto Rico Home Mortgage). The Corporation has two other principal subsidiaries; Popular Securities Incorporated (formerly BP Capital Markets, Inc.), which engages in the business of securities broker-dealer in Puerto Rico, with brokerage, financial advisory, investment and security brokerage operations for institutional and retail customers and Popular International Bank, Inc. ("PIB"), which in turn owns all of the outstanding stock of Popular North America, Inc. (formerly BanPonce Financial Corp) ("PNA"); and ATH Costa Rica, which provides ATM switching and driving services in San Jose, Costa Rica. PIB is a wholly-owned subsidiary of the Corporation organized in 1992 under the laws of the Commonwealth of Puerto Rico and operating as an "international banking entity" under the International Banking Center Regulatory Act of Puerto Rico (the "IBC Act"). PIB is principally engaged in providing managerial services to its subsidiaries. PNA, a wholly-owned subsidiary of PIB and an indirect wholly-owned subsidiary of the Corporation, was organized in 1991 under the laws of the State of Delaware. PNA has five subsidiaries, all of which are wholly-owned: Banco Popular North America (formerly National Bancorp, Inc.), (BPNA), which is the holding company of Banco Popular, Illinois; Banco Popular, N.A. Florida ("Banco Popular (Florida)"), Banco Popular, N.A. (Texas) ("Banco Popular (Texas)"), Banco Popular, N.A. (California) ("Banco Popular (California)") and Banco Popular, FSB. As a result of the ownership of Banco Popular, Illinois, Banco Popular (California), Banco Popular (Florida) and Banco Popular (Texas), PIB, PNA and BPNA are registered bank holding companies under the BHC Act. On May 31, 1997, PNA acquired CBC Bancorp, Ltd. ("CBC") and National Bancorp, Inc. ("NBI"). CBC, an Illinois corporation, was the parent company of Capitol Bank and Trust and Capitol Bank of Westmont, with assets of $325.1 million and deposits of $266.2 million at May 31, 1997, operating three branches in Chicago and Westmont, Illinois through its banking subsidiaries. NBI, a Delaware corporation, was the parent company of AmericanMidwest Bank and Trust with assets of $188.8 million and deposits of $141.4 million at May 31, 1997, operating two branches in Chicago. 3 36 On October 31, 1997, PNA reorganized the structure of its banking operation in the State of Illinois by merging Capitol Bank and Trust, Capitol Bank of Westmont and Banco Popular, Illinois (formerly Pioneer Bank and Trust Company) with and into AmericanMidwest Bank and Trust, whose legal name was changed to Banco Popular, Illinois. Furthermore, the Corporation merged the holding companies of those banks into NBI, whose legal name was changed to BPNA, resulting in a simplified corporate structure where PNA, through its wholly-owned subsidiary of BPNA, holds all the outstanding common stock of Banco Popular, Illinois. The deposits of Banco Popular, Illinois are insured by the Federal Deposit Insurance Corporation ("FDIC"). As of December 31, 1997, the assets of Banco Popular, Illinois were $965.1 million, its deposits were $779.6 million, and its branch network consisted of 13 branches. In addition, Banco Popular, Illinois owns all of the outstanding stock of Popular Leasing, USA, a non-banking subsidiary that offers small ticket equipment leasing in seven states, with total assets of $14 million as of December 31, 1997. On April 30, 1997, PNA acquired Seminole National Bank, a bank organized under the laws of the State of Florida with three branches in that State. In May 1997, Seminole National Bank changed its legal name to Banco Popular, N.A. Florida. As of December 31, 1997, the assets of Banco Popular (Florida) were $67.7 million and its deposits were $55.8 million operating six branches in Florida. The deposits of Banco Popular (Florida) are insured by the FDIC. Also, on December 1, 1997, PNA acquired all of the common stock of Houston BanCorporation, Inc., a corporation organized under the laws of the State of Texas. Houston BanCorporation, Inc. was the bank holding company of Citizens National Bank, which operated one location in Houston, Texas. In December 1997, Houston BanCorporation, Inc. was merged with and into PNA, and the legal name of Citizens National Bank was changed to Banco Popular, N.A. (Texas). As of December 31, 1997, the assets of Banco Popular (Texas) were $66.5 million and its deposits were $44.8 million with one branch operating in Houston, Texas. The deposits of Banco Popular (Texas) are also insured by the FDIC. Banco Popular (California), is a national bank operating six branches in California with total assets of $141.7 million and deposits of $104.6 million as of December 31, 1997. In December 1997, CombanCorp, the holding company of Banco Popular (California), was merged with and into PNA. The deposits of Banco Popular (California) are also insured by the FDIC. Banco Popular, FSB, is a federal savings bank which acquired from the Resolution Trust Corporation certain assets and all of the deposits of four New Jersey branches of the former Carteret Federal Savings Bank, a federal savings bank under Resolution Trust Corporation ("RTC") conservatorship. The deposits of Banco Popular, FSB are insured by the FDIC and it is subject to the supervision of the Office of Thrift Supervision. See "Certain Regulatory Matters". Banco Popular, FSB owns Equity One, Inc., a Delaware corporation ("Equity One"). Equity One is a diversified consumer finance company engaged in the business of making personal and mortgage loans and providing dealer financing through 117 offices in 30 states with total assets of $1.2 billion as of December 31, 1997. Equity One had initially been acquired by PNA on September 30, 1991, prior to which time PNA had no significant business operations. The Corporation's business is described on pages 1 through 26 of the Business Review Section of the Annual Report to Shareholders for the year ended December 31, 1997, which is incorporated herein by reference. REGULATION AND SUPERVISION GENERAL Each of the Corporation, PIB, PNA and BPNA are bank holding companies subject to the supervision and regulation by the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") under the BHC Act. As a bank holding company, the Corporation's, PIB's, PNA's and BPNA's activities and those of their banking and non-banking subsidiaries are limited to the business of banking and activities closely related or incidental to banking, and none of the Corporation, PIB, PNA or BPNA may directly or indirectly acquire the ownership or control of more than 5% of any class of voting shares or substantially all of the assets of any company, in the United States including a bank, without the prior approval of the Federal Reserve Board. In addition, bank holding companies are generally prohibited under the BHC Act from engaging in non-banking activities, subject to certain exceptions. Banco Popular is considered a foreign bank for purposes of the International Banking Act of 1978 (the "IBA"). Under the IBA Banco Popular is not permitted to operate a branch or agency, that is located outside of its "home state", except to the extent that a national bank with the same home state is permitted to do so as described under "Interstate Banking and Legislation" below. Puerto 4 37 Rico is not considered a state for purposes of these geographic limitations. Banco Popular has designated the state of New York as its home state. In addition, some states have laws prohibiting or restricting foreign banks from acquiring banks located in such states and treat Puerto Rico's banks and bank holding companies as foreign banks for such purposes. Banco Popular, Banco Popular, Illinois, Banco Popular (California), Banco Popular (Florida), Banco Popular (Texas) and Banco Popular, FSB are subject to supervision and examination by applicable federal and state banking agencies including, in the case of Banco Popular, the Federal Reserve Board and the Office of the Commissioner of Financial Institutions of Puerto Rico, in the case of Banco Popular, Illinois, the FDIC and the Illinois Commissioner of Banks and Trust Companies, in the case of Banco Popular (California), Banco Popular (Florida) and Banco Popular (Texas) the Office of the Comptroller of the Currency (the "OCC") and in the case of Banco Popular, FSB, the Office of Thrift Supervision (the "OTS") and the FDIC. Banco Popular, Banco Popular, Illinois, Banco Popular (California), Banco Popular (Florida), Banco Popular (Texas) and Banco Popular, FSB are subject to requirements and restrictions under federal and state law, including requirements to maintain reserves against deposits, restrictions on the types and amounts of loans that may be granted and the interest that may be charged thereon, and limitations on the types of other investments that may be made and the types of services that may be offered. Various consumer laws and regulations also affect the operations of Banco Popular, Banco Popular, Illinois, Banco Popular (California), Banco Popular (Florida), Banco Popular (Texas) and Banco Popular, FSB. In addition to the impact of regulations, commercial banks are affected significantly by the actions of the Federal Reserve Board as it attempts to control the money supply and credit availability in order to influence the economy. FDICIA Under the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") the federal banking regulators must take prompt corrective action in respect of depository institutions that do not meet minimum capital requirements. FDICIA and regulations thereunder established five capital tiers: "well capitalized", "adequately capitalized," "undercapitalized", "significantly undercapitalized", and "critically undercapitalized". A depository institution is deemed well capitalized if it maintains a leverage ratio of at least 5%, a risk-based Tier 1 capital ratio of at least 6% and a risk-based total capital ratio of at least 10% and is not subject to any written agreement or directive to meet a specific capital level. A depository institution is deemed adequately capitalized if it is not well capitalized but maintains a leverage ratio of at least 4% (or at least 3% if given the highest regulatory rating and not experiencing or anticipating significant growth), a risk-based Tier 1 capital ratio of at least 4% and a risk-based total capital ratio of at least 8%. A depository institution is deemed undercapitalized if it fails to meet the standards for adequately capitalized institutions (unless it is deemed significantly or critically undercapitalized). An institution is deemed significantly undercapitalized if it has a leverage ratio of less than 3%, a risk-based Tier 1 capital ratio of less than 3% or a risk-based total capital ratio of less than 6%. An institution is deemed critically undercapitalized if it has tangible equity equal to 2% or less of total assets. A depository institution may be deemed to be in a capitalization category that is lower than is indicated by its actual capital position if it receives a less than satisfactory examination rating in any one of four categories. At December 31, 1997, Banco Popular, Banco Popular, Illinois, Banco Popular (California), Banco Popular (Florida), Banco Popular (Texas) and Banco Popular, FSB were each well capitalized. An institution's capital category, as determined by applying the prompt corrective action provisions of law, may not constitute an accurate representation of the overall financial condition or prospects of the Corporation or its banking subsidiaries, and should be considered in conjunction with other available information regarding the Corporation's financial condition and results of operations. FDICIA generally prohibits a depository institution from making any capital distribution (including payment of a dividend) or paying any management fee to its holding company if the depository institution would thereafter be undercapitalized. Undercapitalized depository institutions are subject to restrictions on borrowing from the Federal Reserve System. In addition, undercapitalized depository institutions are subject to growth limitations and are required to submit capital restoration plans. A depository institution's holding company must guarantee the capital plan, up to an amount equal to the lesser of 5% of the depository institution's assets at the time it becomes undercapitalized or the amount of the capital deficiency when the institution fails to comply with the plan. The federal banking agencies may not accept a capital plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution's capital. If a depository institution fails to submit an acceptable plan, it is treated as if it is significantly undercapitalized. Significantly undercapitalized depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets and cessation of receipt of deposits from correspondent banks. Critically undercapitalized depository institutions are subject to appointment of a receiver or conservator. 5 38 The capital-based prompt corrective action provisions of FDICIA and their implementing regulations apply to FDIC-insured depository institutions such as the banking and savings association subsidiaries of the Corporation, PIB, PNA and BPNA, but they are not directly applicable to holding companies, such as the Corporation, PIB, PNA and BPNA which control such institutions. However, federal banking agencies have indicated that, in regulating holding companies, they may take appropriate action at the holding company level based on their assessment of the effectiveness of supervisory actions imposed upon subsidiary insured depository institutions pursuant to such provisions and regulations. HOLDING COMPANY STRUCTURE Banco Popular, Banco Popular, Illinois, Banco Popular (California), Banco Popular (Florida), Banco Popular (Texas) and Banco Popular, FSB are subject to restrictions under federal law that limit the transfer of funds between them and the Corporation, PIB, PNA, BPNA and the Corporation's other non-banking subsidiaries, whether in the form of loans, other extensions of credit, investments or asset purchases. Such transfers by Banco Popular, Banco Popular, Illinois, Banco Popular (California), Banco Popular (Florida), Banco Popular (Texas) or Banco Popular, FSB, respectively, to the Corporation, PIB, PNA or BPNA as the case may be, or to any one non-banking subsidiary, are limited in amount to 10% of the transferring institution's capital stock and surplus and, with respect to the Corporation and all of its non-banking subsidiaries, to an aggregate of 20% of the transferring institution's capital stock and surplus. Furthermore, such loans and extensions of credit are required to be secured in specified amounts. Under the Federal Reserve Board policy, a bank holding company such as the Corporation, PIB, PNA or BPNA is expected to act as a source of financial strength to each of its subsidiary banks and to commit resources to support each subsidiary bank. This support may be required at times when, absent such policy, the bank holding company might not otherwise provide such support. In addition, any capital loans by a bank holding company to any of its subsidiary depository institutions are subordinated in right of payment to deposits and to certain other indebtedness of such subsidiary depository institution. In the event of a bank holding company's bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary depository institution will be assumed by the bankruptcy trustee and entitled to a priority of payment. Banco Popular, Banco Popular, Illinois, Banco Popular (California), Banco Popular (Florida), Banco Popular (Texas) and Banco Popular, FSB are currently the only depository institutions of the Corporation, PIB, PNA and BPNA. Because the Corporation, PIB, PNA and BPNA are holding companies, their right to participate in the assets of any subsidiary upon the latter's liquidation or reorganization will be subject to the prior claims of the subsidiary's creditors (including depositors in the case of subsidiary depository institutions) except to the extent that the Corporation, PIB, PNA or BPNA as the case may be, may itself be a creditor with recognized claims against the subsidiary. Under the Federal Deposit Insurance Act (the "FDIA"), a depository institution (which term includes both banks and savings associations), the deposits of which are insured by the FDIC, can be held liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC in connection with (i) the default of a commonly controlled FDIC-insured depository institution or (ii) any assistance provided by the FDIC to any commonly controlled FDIC-insured depository institution "in danger of default". "Default" is defined generally as the appointment of a conservator or a receiver and "in danger of default" is defined generally as the existence of certain conditions indicating that a default is likely to occur in the absence of regulatory assistance. Banco Popular, Banco Popular, Illinois, Banco Popular (California), Banco Popular (Florida), Banco Popular (Texas) and Banco Popular, FSB are all currently FDIC-insured depository institutions of the Corporation. In some circumstances (depending upon the amount of the loss or anticipated loss suffered by the FDIC), cross-guarantee liability may result in the ultimate failure or insolvency of one or more insured depository institutions in a holding company structure. Any obligation or liability owed by a subsidiary depository institution to its parent company is subordinated to the subsidiary bank's cross-guarantee liability with respect to commonly controlled insured depository institutions. DIVIDEND RESTRICTIONS The principal regular source of cash flow for the Corporation is dividends from Banco Popular. Various statutory provisions limit the amount of dividends Banco Popular can pay to the Corporation without regulatory approval. As a member bank subject to the regulation of the Federal Reserve Board, Banco Popular must obtain the approval of the Federal Reserve Board for any dividend if the total of all dividends declared by the member bank in any calendar year would exceed the total of its net profits, as defined by the 6 39 Federal Reserve Board, for that year, combined with its retained net profits for the preceding two years. In addition, a member bank may not pay a dividend in an amount greater than its undivided profits then on hand after deducting its losses and bad debts. For this purpose, bad debts are generally defined to include the principal amount of loans that are in arrears with respect to interest by six months or more unless such loans are fully secured and in the process of collection. Moreover, for purposes of this limitation, a member bank is not permitted to add the balance in its allowance for loan losses account to its undivided profits then on hand. A member bank may, however, net the sum of its bad debts as so defined against the balance in its allowance for loan losses account and deduct from undivided profits only bad debts as so defined in excess of that account. At December 31, 1997, Banco Popular could have declared a dividend of approximately $257.7 million without the approval of the Federal Reserve Board. Illinois law contains similar limitations on the amount of dividends that Banco Popular, Illinois can pay and the National Bank Act contains similar limitations, on the amount of dividends Banco Popular (California), Banco Popular (Florida) and Banco Popular (Texas) can pay. In addition, OTS regulations limit the amount of capital distributions (whether by dividend or otherwise) that any savings association may make without prior OTS approval, based upon the savings association's regulatory capital levels. These limitations are applicable to Banco Popular, FSB. Also, in connection with the acquisition by Banco Popular, FSB, from the RTC of four New Jersey branches of the former Carteret Federal Savings Bank, the RTC provided Banco Popular, FSB and the Corporation interim financial assistance. The loan is secured with the issued and outstanding shares of common stock of Banco Popular, FSB. Pursuant to the terms of such financing, evidenced by a promissory note (which matures on January 20, 2000 but is prepayable any time before then), Banco Popular, FSB may not, among other things, declare or pay any dividends on its outstanding capital stock (unless such dividends are used exclusively for payment of principal of or interest on such promissory note) or make any distributions of its assets until payment in full of such promissory note. The payment of dividends by Banco Popular, Banco Popular, Illinois, Banco Popular (California), Banco Popular (Florida), Banco Popular (Texas) or Banco Popular, FSB may also be affected by other regulatory requirements and policies, such as the maintenance of adequate capital. If, in the opinion of the applicable regulatory authority, a depository institution under its jurisdiction is engaged in, or is about to engage in, an unsafe or unsound practice (that, depending on the financial condition of the depository institution, could include the payment of dividends), such authority may require, after notice and hearing, that such depository institution cease and desist from such practice. The Federal Reserve Board has issued a policy statement that provides that insured banks and bank holding companies should generally pay dividends only out of current operating earnings. In addition, all insured depository institutions are subject to the capital-based limitations required by the FDICIA. See "FDICIA". See "Puerto Rico Regulation" for a description of certain restrictions on Banco Popular's ability to pay dividends under Puerto Rico law. FDIC INSURANCE ASSESSMENTS Banco Popular, Banco Popular, Illinois, Banco Popular (California), Banco Popular (Florida), Banco Popular (Texas) and Banco Popular, FSB are subject to FDIC deposit insurance assessments. Pursuant to FDICIA, the FDIC has adopted a risk-based assessment system, under which the assessment rate for an insured depository institution varies according to the level of risk incurred in its activities. An institution's risk category is based partly upon whether the institution is well capitalized, adequately capitalized or less than adequately capitalized. Each insured depository institution is also assigned to one of the following "supervisory subgroups": "A", "B" or "C". Group "A" institutions are financially sound institutions with only a few minor weaknesses; Group "B" institutions are institutions that demonstrate weaknesses that, if not corrected, could result in significant deterioration; and Group "C" institutions are institutions for which there is a substantial probability that the FDIC will suffer a loss in connection with the institution unless effective action is taken to correct the areas of weakness. The FDIC reduced the insurance premiums it charges on bank deposits insured by the Bank Insurance Fund ("BIF") to the statutory minimum of $2,000.00 for "well capitalized" banks, effective January 1, 1996. On September 30, 1996, the Deposit Insurance Funds Act of 1996 ("DIFA") was enacted and signed into law. DIFA repealed the statutory minimum premium, and currently premiums related to deposits assessed by both the BIF and the Savings Association Insurance Fund ("SAIF") are to be assessed at a rate of between 0 cents and 27 cents per $100.00 of deposits. DIFA also provided for a special one-time assessment imposed on deposits insured by the SAIF to recapitalize the SAIF to bring the SAIF up to statutory required levels. 7 40 DIFA also separated, effective January 1, 1997, the Financing Corporation ("FICO") assessment to service the interest on its bond obligations from the BIF and SAIF assessments. The amount assessed on individual institutions by the FICO will be in addition to the amount, if any, paid for deposit insurance according to the FDIC's risk-related assessment rate schedules. FICO assessment rates for the first semiannual period of 1997 were set at 1.30 basis points annually for BIF-assessable deposits and 6.48 basis points annually for SAIF-assessable deposits. (These rates may be adjusted quarterly to reflect changes in assessment bases for the BIF and the SAIF. By law, the FICO rate on BIF-assessable deposits must be one-fifth the rate on SAIF-assessable deposits until the insurance funds are merged or until January 1, 2000, whichever occurs first). As of December 31, 1997, the Corporation had a BIF deposit assessment base of approximately $11.0 billion and a SAIF deposit assessment base of approximately $226 million. BROKERED DEPOSITS FDIC regulations adopted under FDICIA govern the receipt of brokered deposits. Under these regulations, a bank cannot accept, roll over or renew brokered deposits (which term is defined also to include any deposit with an interest rate more than 75 basis points above prevailing rates) unless (i) it is well capitalized or (ii) it is adequately capitalized and receives a waiver from the FDIC. A bank that is adequately capitalized may not pay an interest rate on any deposits in excess of 75 basis points over certain prevailing market rates specified by regulation. There are no such restrictions on a bank that is well capitalized. The Corporation does not believe the brokered deposits regulation has had or will have a material effect on the funding or liquidity of Banco Popular, Banco Popular, Illinois, Banco Popular (California), Banco Popular (Florida), Banco Popular (Texas) or Banco Popular, FSB. CAPITAL ADEQUACY Information about the capital composition of the Corporation as of December 31, 1997 and for the four previous years is presented in Table I "Capital Adequacy Data", on page F-17 in the "Management Discussion and Analysis of Financial Condition and Results of Operations" (the "MD&A") and is incorporated herein by reference. Under the Federal Reserve Board's risk-based capital guidelines for bank holding companies and member banks, the minimum guidelines for the ratio of qualifying total capital ("Total capital") to risk-weighted assets (including certain off-balance sheet items, such as standby letters of credit) is 8%. At least half of the Total capital is to be comprised of common equity, retained earnings, minority interest in unconsolidated subsidiaries, non-cumulative perpetual preferred stock and a limited amount of cumulative perpetual preferred stock, less goodwill, and certain other intangible assets discussed below ("Tier 1 Capital"). The remainder may consist of a limited amount of subordinated debt, other preferred stock, certain other instruments and a limited amount of loan and lease loss reserves ("Tier 2 Capital"). The Federal Reserve Board has adopted regulations that require most intangibles, including core deposit intangibles, to be deducted from Tier 1 Capital. The regulations, however, permit the inclusion of a limited amount of intangibles related to purchased mortgage servicing rights, purchased credit card relationships and include a "grandfather" provision permitting the continued inclusion of certain existing intangibles. In addition, the Federal Reserve Board has established minimum leverage ratio guidelines for bank holding companies and member banks. These guidelines provide for a minimum ratio of Tier 1 Capital to total assets, less goodwill and certain other intangible assets discussed below (the "leverage ratio") of 3% for bank holding companies and member banks that meet certain specified criteria, including that they have the highest regulatory rating. All other bank holding companies and member banks will be required to maintain a leverage ratio of 3% plus an additional cushion of at least 100 to 200 basis points. The guidelines also provide that banking organizations experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels, without significant reliance on intangible assets. Furthermore, the guidelines indicate that the Federal Reserve Board will continue to consider a "tangible Tier 1 leverage ratio" and other indicia of capital strength in evaluating proposals for expansion or new activities. The tangible Tier 1 leverage ratio is the ratio of a banking organization's Tier 1 Capital less all intangibles, to total assets less all intangibles. Banco Popular is subject to the risk-based and leverage capital requirements adopted by the Federal Reserve Board. See Consolidated Financial Statements, Note 19 "Regulatory Capital Requirements" on page F-60 of the MD&A, for the capital ratios of the Corporation and of Banco Popular. 8 41 Banco Popular, Illinois, Banco Popular (California), Banco Popular (Florida), Banco Popular (Texas) and Banco Popular, FSB are subject to similar capital requirements adopted by the FDIC, the OCC and the OTS, respectively. Failure to meet capital guidelines could subject a bank to a variety of enforcement remedies, including the termination of deposit insurance by the FDIC, and to certain restrictions on its business. See "FDICIA". Interstate Banking Legislation The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 permits bank holding companies, with Federal Reserve Board approval, to acquire banks located in states other than the holding company's home state, generally without regard to whether the transaction is prohibited under state law. In addition, commencing June 1, 1997, national and state banks with different home states were permitted to merge across state lines, with approval of the appropriate federal banking agency, unless the home state of a participating bank passed legislation prior to May 31, 1997 expressly prohibiting interstate mergers. States may permit de novo interstate branching. Once a bank has established branches in a state through an interstate merger transaction, the bank may establish and acquire additional branches at any location in the state where any bank involved in the interstate merger transaction could have established or acquired branches under applicable federal or state law. A bank that has established a branch in a state through de novo branching may establish and acquire additional branches in such state in the same manner and to the same extent as a bank having a branch in such state as a result of an interstate merger. If a state opted out of interstate branching within the specified time period, no bank in any other state may establish a branch in the state which has opted out, whether through an acquisition or de novo. A foreign bank, like Banco Popular, may branch interstate by merger or de novo to the same extent as domestic banks in the foreign bank's home state, which, in the case of Banco Popular, is New York. Various other legislation, including proposals to overhaul the bank regulatory system, expand bank and bank holding company powers and limit the investments that a depository institution may make with insured funds, is from time to time introduced in Congress. The Corporation, PIB, PNA and BPNA cannot determine the ultimate effect that such potential legislation, if enacted, or implementing regulations, would have upon their financial condition or results of operations. Puerto Rico Regulation General As a commercial bank organized under the laws of Puerto Rico, Banco Popular is subject to the supervision, examination and regulation by the Office of the Commissioner of Financial Institutions of Puerto Rico (the "Office of the Commissioner"), pursuant to the Puerto Rico Banking Act of 1933, as amended (the "Banking Law"). Section 27 of the Banking Law requires that at least ten percent (10%) of the yearly net income of Banco Popular be credited annually to a reserve fund. This apportionment shall be done every year until the reserve fund shall be equal to the total of paid-in capital on common and preferred stock. At the end of its most recent fiscal year, Banco Popular had a fund established in compliance with these requirements. Section 27 of the Banking Law also provides that when the expenditures of a bank are greater than the receipts, the excess of the former over the latter shall be charged against the undistributed profits of the bank, and the balance, if any, shall be charged against the reserve fund, as a reduction thereof. If there is no reserve fund sufficient to cover such balance in whole or in part, the outstanding amount shall be charged against the capital account and no dividend shall be declared until said capital has been restored to its original amount and the reserve fund to 20% of the original capital. Section 16 of the Banking Law requires every bank to maintain a legal reserve that, except as otherwise provided by the Office of the Commissioner, shall not be less than 20% of its demand liabilities, excluding government deposits (federal, state and municipal) which are secured by actual collateral. Furthermore, if a bank is authorized to establish one or more bank branches in a State of the United States or in a foreign country, where such branches are subject to the reserve requirements of that state or country, the Office of the Commissioner may exempt said branch or branches of the reserve requirements of Section 16. However, since Banco Popular is a member of the Federal Reserve System, it has been exempted from such requirements, with respect to deposits payable in Puerto Rico, 9 42 pursuant to an order of the Board of Governors of the Federal Reserve System dated November 24, 1982. The reserve requirements of Section 16 apply to those deposits. Section 17 of the Banking Law permits Banco Popular to make loans to any one person, firm, partnership or corporation, up to an aggregate amount of fifteen percent (15%) of the paid-in capital and reserve fund of the Bank. As of December 31, 1997, the legal lending limit for the Bank under this provision was approximately $106 million. If such loans are secured by collateral worth at least twenty-five percent (25%) more than the amount of the loan, the aggregate maximum amount may reach one third of the paid-in capital of the Bank, plus its reserve fund. There are no restrictions under Section 17 on the amount of loans that are wholly secured by bonds, securities and other evidence of indebtedness of the Government of the United States or Puerto Rico, or by current debt bonds, not in default, of municipalities or instrumentalities of Puerto Rico. Section 14 of the Banking Law authorizes Banco Popular to conduct certain financial and related activities directly or through subsidiaries, including finance leasing of personal property, making and servicing mortgage loans and operating a small loan company. Banco Popular engages in these activities through its wholly-owned subsidiaries, Popular Leasing & Rental, Inc., Popular Mortgage, Inc. and Popular Finance Inc, respectively, all of which are organized and operate in Puerto Rico. The Finance Board, which is a part of the Office of the Commissioner, but also includes as its members the Secretary of the Treasury, the Secretary of Commerce, the Secretary of Consumer Affairs, the President of the Planning Board, and the President of the Government Development Bank for Puerto Rico, has the authority to regulate the maximum interest rates and finance charges that may be charged on loans to individuals and unincorporated businesses in Puerto Rico. The current regulations of the Finance Board provide that the applicable interest rate on loans to individuals and unincorporated businesses (including real estate development loans but excluding certain other personal and commercial loans secured by mortgages on real estate properties) is to be determined by free competition. The Finance Board also has authority to regulate the maximum finance charges on retail installment sales contracts, which are currently set at 21%, and for credit card purchases, which are currently set at 26%. There is no maximum rate set for installment sales contracts involving motor vehicles, commercial, agricultural and industrial equipment, commercial electric appliances and insurance premiums. On March 4, 1998, legislation was approved in the U.S. House of Representatives (the "Political Status Act"), proposing a mechanism to settle permanently the political relationship between Puerto Rico and the United States, either through full self-government (e.g. statehood or independence, including as an alternative, free association via a bilateral treaty) or continued Commonwealth status. Under the proposed legislation, failure to settle on full self-government after completion of the referenda process provided therein would result in retention of the current Commonwealth status. It is not possible at this time to predict when the Political Status Act will be voted on by the Senate of the U.S. and whether is will be subsequently enacted into law. A change in the political status of Puerto Rico could result in modifications to or elimination of the Puerto Rico laws providing favorable tax treatment for certain investment securities such as U.S. Treasury Notes, GNMAs, etc. It is not possible to predict to what extent any adverse effects of such a change in political status would be offset by possible beneficial economic changes resulting from a change in political status, nor the transition period which would be provided after completion of the referenda process if the Political Status Act becomes law. IBC Act Under the IBC Act, without the prior approval of the Office of the Commissioner, PIB may not amend its articles of incorporation or issue additional shares of capital stock or other securities convertible into additional shares of capital stock unless such shares are issued directly to the shareholders of PIB previously identified in the application to organize the international banking entity, in which case notification to the Office of the Commissioner must be given within ten business days following the date of the issue. Pursuant to the IBC Act, without the prior approval of the Office of the Commissioner, PIB may not initiate the sale, encumbrance, assignment, merger or other transfer of shares if by such transaction a person or persons acting in concert could acquire direct or indirect control of 10% or more of any class of the Company's stock. Such authorization must be requested at least 30 days prior to the transaction. PIB must submit to the Office of the Commissioner a report of its condition and results of operation on a quarterly basis and its annual audited financial statement at the close of its fiscal year. Under the IBC Act, PIB may not deal with "domestic persons" as such term is defined in the IBC Act. Also, it may only engage in those activities authorized in the IBC Act, the regulations adopted thereunder and its license. 10 43 The IBC Act empowers the Office of the Commissioner to revoke or suspend, after a hearing, the license of an international banking entity if, among other things, it fails to comply with the IBC Act, regulations issued by the Office of the Commissioner or the terms of its license or if the Office of the Commissioner finds that the business of the international banking entity is conducted in a manner not consistent with the public interest. Employees At December 31, 1997, the Corporation employed 8,854 persons. None of its employees are represented by a collective bargaining group. ITEM 2. PROPERTIES As of December 31, 1997, Banco Popular owned (and wholly or partially occupied) approximately 76 branch premises and other facilities throughout the Commonwealth and branch premises in New York. In addition, as of such date, Banco Popular leased properties for branch operations in approximately 133 locations in Puerto Rico, 16 locations in New York and 7 locations in the U.S. Virgin Islands. The Corporation's management believes that each of its facilities is well-maintained and suitable for its purpose. The principal properties owned by the Corporation for banking operations and other services are described below: Popular Center, the metropolitan area headquarters building, located at 209 Munoz Rivera Avenue, Hato Rey, Puerto Rico, a 20 story office building. Approximately 55% of the office space is leased to outside tenants. Cupey Center Complex, three buildings, one of three stories, and two of two stories each, located at Cupey, Rio Piedras, Puerto Rico. The computer center, operational and support services, and a recreational center for employees are some of the main activities conducted at these facilities. The facilities are fully occupied by Banco Popular's personnel. Stop 22 - Santurce building, a twelve story structure located in Santurce, Puerto Rico. A branch, the accounting department, the human resources division and the auditing department are the main activities conducted located at this facility, which is fully occupied by Banco Popular's personnel. San Juan building, a twelve story structure located at Old San Juan, Puerto Rico. Banco Popular occupies approximately 40% of the building for a branch operation, a regional office, an exhibit room and other facilities. The rest of the building is rented to outside tenants. Mortgage Loan Center, a six story building, a four story building, and a one story building, located at 153, 167 and 157 Ponce de Leon Avenue, Hato Rey, Puerto Rico, respectively, are fully occupied by the mortgage loans and mortgage servicing departments. New York building, a nine story structure with two underground levels located at 7 West 51st. Street, New York City, where approximately 92% of the office space is used for banking operations. The remaining space is rented or available for rent to outside tenants. Banco Popular, Illinois, a three story building located at 4000-4008 West North Avenue, Chicago, Illinois. A full service branch of Banco Popular, Illinois, the executive offices, the human resources division and the bank's operation department, are the main activities conducted at this facility. Banco Popular (Florida), a two story building located at 5551 Vanguard Street, Orlando, Florida. Credit cards operations, finance and accounting department and the bank's operation services are the main activities conducted at this facility. Banco Popular (Texas), a one story building located at 1615 Little York Road, Houston, Texas. A full service branch of Banco Popular (Texas) and the administrative offices are located at this facility. ITEM 3. LEGAL PROCEEDINGS The Corporation and its subsidiaries are defendants in various lawsuits arising in the ordinary course of business. Management believes, based on the opinion of legal counsel, that the aggregate liabilities, if any, arising from such actions would not have a material adverse effect on the financial position of the Corporation. 11 44 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Corporation's common stock (the "Common Stock") is traded on the National Association of Securities Dealers Automated Quotation (NASDAQ) National Market System under the symbol BPOP. Information concerning the range of high and low sales prices for the Corporation's common shares for each quarterly period during 1997 and the previous four years, as well as cash dividends declared is contained under Table J, "Common Stock Performance", on page F-18 and under the caption "Stockholders' Equity" on page F-16 in the MD&A, and is incorporated herein by reference. At the annual meeting of stockholders on April 25, 1997, the Corporation's shareholders approved amendments to the Corporation's Restated Articles of Incorporation to increase the total number of authorized shares of capital stock to 190,000,000. The authorized capital stock of the Corporation consists of 180,000,000 shares of Common Stock, par value of $6.00 per share, and 10,000,000 shares of Preferred Stock without par value. Information concerning legal or regulatory restrictions on the payment of dividends by the Corporation and Banco Popular is contained under the caption "Regulation and Supervision" in Item 1 herein. As of February 27, 1998, the Corporation had 6,044 stockholders of record of its Common Stock, not including beneficial owners whose shares are held in record names of brokers or other nominees. The last sales price for the Corporation's Common Stock on such date, as quoted on the NASDAQ was $52.28 per share. The Corporation currently has outstanding $125 million subordinated notes due December 15, 2005 with interest payable semi-annually at 6.75%. These notes are unsecured subordinated obligations which are subordinated in right of payment in full to all present and future senior indebtedness of the Corporation. These notes do not provide for any sinking fund. On February 1997, BanPonce Trust I, a statutory business trust created under the laws of the State of Delaware, that is wholly-owned by PNA and indirectly wholly-owned by the Corporation, through certain underwriters, sold to institutional investors $150 million of its 8.327% Capital Securities Series A. These capital securities qualify as Tier I capital and are fully and unconditionally guaranteed by the Corporation. On May 8, 1997, the Board of Directors of the Corporation approved a stock repurchase program which allows the Corporation to repurchase in the open market, at such times and prices as market condition shall warrant, up to three million shares of its outstanding common stock. As of December 31, 1997, the Corporation had purchased 988,800 shares under this program for a total cost of $39.6 million. On May 23, 1997, a shelf registration was filed with the Securities and Exchange Commission, allowing the Corporation to issue medium-term notes, unsecured debt securities and preferred stock in an aggregate amount of up to $1 billion. These securities are guaranteed by the Corporation. As of December 31, 1997, the Corporation had issued $230 million in medium-term notes under that shelf registration. The Puerto Rico Income Tax Act of 1954, as amended, generally imposes a withholding tax on the amount of any dividends paid by corporations to individuals, whether residents of Puerto Rico or not, trusts, estates and special partnerships at a special 10% withholding tax rate. If the recipient is a foreign corporation or partnership not engaged in trade or business within Puerto Rico the withholding tax is also 10%. Prior to the first dividend distribution for the taxable year, individuals who are residents of Puerto Rico may elect to be taxed on the dividends at the regular rates, in which case the special 10% tax will not be withheld from such year's distributions. United States citizens who are non-residents of Puerto Rico will not be subject to Puerto Rico tax on dividends if said individual's gross income from sources within Puerto Rico during the taxable year does not exceed $1,300 if single, or $3,000 if married, and form AS 2732 of the Puerto Rico Treasury Department "Withholding Tax Exemption Certificate for the Purpose of Section 1147", is filed with the withholding agent. 12 45 U.S. income tax law permits a credit against U.S. income tax liability, subject to certain limitations, for certain foreign income taxes paid or deemed paid with respect to such dividends. ITEM 6. SELECTED FINANCIAL DATA The information required by this item appears in Table B, "Selected Financial Data" on pages F-4 and F-5 and the text under the caption "Earnings Analysis", on page F-7 in the MD & A, and is incorporated herein by reference. The Corporation's ratio of earnings to fixed charges on a consolidated basis for each of the last five years is as follows:
Year ended December 31, ----------------------- Ratio of Earnings to Fixed Charges: 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Excluding Interest on Deposits 1.8 2.0 2.0 2.6 3.0 Including Interest on Deposits 1.4 1.4 1.4 1.5 1.5 Ratio of Earnings to Fixed Charges and Preferred Stock Dividends: Excluding Interest on Deposits 1.8 2.0 2.0 2.5 3.0 Including Interest on Deposits 1.4 1.4 1.4 1.5 1.5
For purposes of computing these consolidated ratios, earnings represent income before income taxes, plus fixed charges. Fixed charges represent all interest expense (ratios are presented both excluding and including interest on deposits), the portion of net rental expense which is deemed representative of the interest factor and the amortization of debt issuance expense. The Corporation's long-term senior debt and preferred stock on a consolidated basis for each of the last five years ended December 31, is as follows:
Year ended December 31, ----------------------- (In thousands) 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Long-term obligations $1,678,696 $1,111,713 $885,428 $489,524 $283,855 Non-Cumulative preferred stock of the Corporation 100,000 100,000 100,000 100,000 -0- Cumulative perpetual preferred stock of Banco Popular -0- -0- -0- -0- 11,000
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this item appears on page F-2 through F-36 in the MD&A, and is incorporated herein by reference. Table L, "Maturity Distribution of Earning Assets", on page F-23 in the MD&A, has been prepared on the basis of contractual maturities. The Corporation does not have a policy with respect to rolling over maturing loans, but rolls over loans only on a case-by-case basis after review of such loans in accordance with the Corporation's lending criteria. 13 46 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information regarding the market risk of the Corporation appears on pages F-19 through F-22 in the MD&A, under the caption "Market Risk" and is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this item appears on pages F-37 through F-84, and on page F-34 under the caption "Statistical Summary - Quarterly Financial Data", in the MD&A and is incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information contained under the captions "Shares Beneficially Owned by Directors, Nominees and Executive Officers of the Corporation", "Section 16(a) Beneficial Ownership Reporting Compliance" and "Board of Directors and Committees" including the "Nominees for Election as Directors" and "Executive Officers" of the Corporation's definitive proxy statement filed with the Securities and Exchange Commission on or about March 18, 1998 (the "Proxy Statement"), is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information under the caption "Executive Compensation Program", and under the caption "Popular, Inc. Performance Graphs" of the Proxy Statement, is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information under the captions "Principal Stockholders" and under "Shares Beneficially Owned by Directors, Nominees and Executive Officers of the Corporation" of the Proxy Statement, is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information under the caption "Family Relationships" and "Other relationships and transactions" of the Proxy Statement, is incorporated herein by reference. 14 47 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K A. The following documents are part of this report and appear on the pages indicated.
(1) Financial Statements: Report of Independent Accountants ................................................................... F-37 Consolidated Statements of Condition as of December 31, 1997 and 1996 ............................... F-38 Consolidated Statements of Income for each of the years in the three-year period ended December 31, 1997 .............................................................................. F-39 Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 1997 .............................................................................. F-40 Consolidated Statements of Changes in Stockholders' Equity for each of the years in the three-year period ended December 31, 1997 ...................................................... F-41 Notes to Consolidated Financial Statements .......................................................... F-42 (2) Financial Statement Schedules: No schedules are presented because the information is not applicable or is included in the Consolidated Financial Statements described in A.1 above or in the notes thereto. (3) Exhibits The exhibits listed on the Exhibits Index on page 17 of this report are filed herewith or are incorporated herein by reference.
B. The Corporation filed one report on Form 8-K during the quarter ended December 31, 1997. Dated: October 7, 1997 Items reported: Item 5 - Other Events Item 7 - Financial Statements and Exhibits 15 48 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. POPULAR, INC. ------------- (Registrant) By: /s/ RICHARD L. CARRION ------------------------------- Richard L. Carrion Chairman of the Board, President and Chief Executive Officer Dated: 02-12-98 (Principal Executive Officer) -------------- By: /S/JORGE A. JUNQUERA ------------------------------- Jorge A. Junquera Senior Executive Vice President Dated: 02-12-98 (Principal Financial Officer) -------------- By: /s/AMILCAR L. JORDAN ------------------------------- Amilcar L. Jordan Senior Vice President Dated: 02-12-98 (Principal Accounting Officer) -------------- Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /S/RICHARD L. CARRION Chairman of the Board, - ---------------------------- President and Chief Richard L. Carrion Executive Officer 02-12-98 -------- /S/ALFONSO F. BALLESTER Vice Chairman of - ---------------------------- the Board Alfonso F. Ballester 02-12-98 -------- - ---------------------------- Vice Chairman of Antonio Luis Ferre the Board -------- /S/SALUSTIANO ALVAREZ MENDEZ - ---------------------------- Salustiano Alvarez Mendez Director 02-12-98 -------- /S/JUAN J. BERMUDEZ - ---------------------------- Juan J. Bermudez Director 02-12-98 -------- /S/FRANCISCO J. CARRERAS - ---------------------------- Francisco J. Carreras Director 02-12-98 -------- /S/DAVID H. CHAFEY, JR. - ---------------------------- David H. Chafey, Jr. Director 02-12-98 -------- 16 49 /S/LUIS E. DUBON, JR. - ---------------------------- Luis E. Dubon, Jr. Director 02-12-98 -------- /S/HECTOR R. GONZALEZ - ---------------------------- Hector R. Gonzalez Director 02-12-98 -------- /S/JORGE A. JUNQUERA - ---------------------------- Jorge A. Junquera Director 02-12-98 -------- /S/MANUEL MORALES, JR. - ---------------------------- Manuel Morales, Jr. Director 02-12-98 -------- /S/ALBERTO M. PARACCHINI - ---------------------------- Alberto M. Paracchini Director 02-12-98 -------- /S/FRANCISCO M. REXACH, JR. - ---------------------------- Francisco M. Rexach, Jr. Director 02-12-98 -------- /S/J. ADALBERTO ROIG, JR. - ---------------------------- J. Adalberto Roig, Jr. Director 02-12-98 -------- - -------------------------- Felix J. Serralles, Jr. Director -------- /S/JULIO E. VIZCARRONDO, JR. - ---------------------------- Julio E. Vizcarrondo, Jr. Director 02-12-98 -------- 17 50 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION FOOTNOTE - -------------------------------------------------------------------------------------------------------------- 3.1 Restated Articles of Incorporation and By-Laws of Popular, Inc. 4.1 Form of certificate for common stock. (1a) 4.2 Certificates of Resolution of the Board of Directors of Popular, Inc. dated August 11, 1988 creating a series of Preferred Stock of the Corporation designated as Series A Participating Cumulative Preferred Stock Purchase rights and the designation and amount of such series, the voting power preferences, and relative, participating, optional, or other special rights of the shares of such series, and the qualifications, limitations or restrictions thereof. Rights Agreement dated as of August 11, 1988 by and between Popular, Inc. and Chemical Bank (as successor to Manufacturers Hanover Trust Company) regarding the issuance of certain Rights to the Corporation's shareholders ("Rights Agreement"). (2) 4.3 Amendment to Rights Agreement dated as of December 11, 1990. (3) 4.4 Indenture dated October 1, 1991, as supplemented by the First Supplemental Indenture thereto, dated February 28, 1995, each among Popular North America, Inc., Popular, Inc. and Guarantor, and Citibank, N.A., as Trustee, and as further supplemented by the Second Supplemental Indenture thereto, dated May 8, 1997, among Popular North America, Inc., Popular, Inc. and Guarantor, and The First National Bank of Chicago, as Trustee. (2a) 4.5 Form of medium-term fixed rate note of Popular North America, Inc. guaranteed by Popular, Inc. (2b) 4.6 Form of medium-term floating rate note of Popular North America, Inc. guaranteed by Popular, Inc. (2c) 4.7 Form of Certificate of 8.35% non-cumulative monthly Income Preferred Stock, 1994 Series A (Liquidation Preference $25.00 per share). (4) 4.8 Form S-3 filed in connection with the issuance of debt securities and preferred stock of Popular, Inc. and Popular International Bank, Inc. and Popular North America, Inc. guaranteed by Popular, Inc. in the aggregate amount of $1,000,000,000. (5) 4.8.1 Form S-3 filed in connection with the issuance of debt securities and preferred stock of Popular, Inc., and Popular International, Bank, Inc. and Popular North America, Inc. guaranteed by Popular, Inc. in the aggregate amount of $1,000,000,000. (5a) 4.9 Subordinated Indenture of Popular, Inc, dated November 30, 1995, between Popular, Inc. and the First National Bank of Chicago, as trustee, and related to 6 3/4% subordinated notes due December 15, 2005 in the aggregate amount of $125,000,000. (6) 4.10 Form of Subordinated Note of Popular, Inc. (7) 4.11 Indenture dated February 15, 1995, as supplemented by the First Supplemental Indenture thereto, dated May 8, 1997, each among Popular, Inc. and the First National Bank of Chicago, as Trustee. (8) 4.12 Form of medium-term fixed rate note of Popular, Inc. (9) 4.13 Form of medium-term floating rate note of Popular, Inc (10) 4.14 Form of Fixed Rate Medium-Term Note, Series 3 of Popular, Inc. (10a) 4.15 Form of Floating Rate Medium-Term Note, Series 3, of Popular, Inc. (10b) 4.16 Form of Fixed Rate Medium-Term Note, Series D, of Popular North America, Inc., endorsed with the guarantee of Popular, Inc. (10c) 4.17 Form of Floating Rate Medium-Term Note, Series D, of Popular North America, Inc., endorsed with the guarantee of Popular, Inc. (10d) 10.2 Form 8-A Filing filed in connection with the Series A Participating Cumulative Preferred Stock Purchase Rights. (11) 10.8 Management Incentive Plan for certain Division Supervisors approved in January, 1987. (12) 10.8.1 Popular, Inc. Senior Executive Long-Term Incentive Plan dated October 6, 1994. (13) 10.9 Stock Deferment Plan for outside directors effective on August 15, 1996. (14) 10.11 $85,785,000 Banco Popular de Puerto Rico 1992 Grantor Trust 1 Mortgage Pass - Through Certificates, Class A, offering memorandum dated June 25, 1992. Underwriting Agreement by and between Merrill Lynch, Pierce, Fenner & Smith, Incorporated acting through its Puerto Rico branch office and Lehman Brothers Puerto Rico, Inc. and Banco Popular de Puerto Rico dated June 25, 1992; Insurance Agreement by and between Municipal Bond Investors Assurance Corporation as Insurer, Banco Popular de Puerto Rico as Settlor, Banco Popular de Puerto Rico as Servicer, Banco Central as Collateral Agent and Banco Central as Trustee dated June 25, 1992. (15)
18 51 10.12.2 Revolving Credit and competitive advance facility and credit agreement by and between Popular, Inc. and Popular North America, Inc. and Chemical Bank, as agent bank, for borrowing up to the principal amount of $500,000,000 dated as of November 3, 1995. (16) 10.13 Banco Popular de Puerto Rico Bank's Note Program up to the aggregate amount of $600,000,000 executed on September 24, 1996. (17) 10.14 Popular North America, Inc., 6 3/4% Medium Term Notes, Series C, due August 9, 2001 in the aggregate principal amount of $75,000,000. (18) 12.0 Computation of Ratio of Earnings to Fixed Charges 13.1 Registrants Annual Report to Shareholders for the year ended December 31, 1997 21.1 Schedule of Subsidiaries 23.1 Consent of Independent Auditors 27.0 Financial Data Schedule (for SEC use only) 99.1 Registrant's Proxy Statement for the April 23, 1998 Annual Meeting of Stockholders
- - - - - - - - - - - - - - - - - - - - - - - - (1a) Incorporated by reference to exhibit 4.1 of the Corporation's Annual Report on Form 10-K for the year ended December 31, 1990 (the "1990 Form 10-K"). (2) Incorporated by reference to Exhibit 4.3 of Registration Statement No. 33-39028. (2a) Incorporated by reference to Exhibit 4 (f) of Registration Statement No. 333-26941. (2b) Incorporated by reference to Exhibit 2 on Form 8-K filed on October 8, 1991. (2c) Incorporated by reference to Exhibit 3 on Form 8-K filed on October 8, 1991. (3) Incorporated by reference to Exhibit 4.4 of Registration Statement No. 33-39028. (4) Incorporated by reference to Exhibit 4.7 of the 1994 Form 10-k. (5) Incorporated by reference to Registration Statement No. 33-61601. (5a) Incorporated by reference to Registration Statement No. 333-26941. (6) Incorporated by reference to Exhibit 4(e) on Form 8-K filed on December 13, 1995. (7) Incorporated by reference to Exhibit 4(p) on Form 8-K filed on December 13, 1995. (8) Incorporated by reference to Exhibit 4(d) of Registration Statement No. 333-26941. (9) Incorporated by reference to Exhibit 4(a) on Form 8-K filed on April 13, 1995. (10) Incorporated by reference to Exhibit 4(b) on Form 8-K filed on April 13, 1995. (10a) Incorporated by reference to Exhibit 4(1) of Form 8-K filed on June 11, 1997. (10b) Incorporated by reference to Exhibit 4(m) of Form 8-K filed on June 11, 1997. (10c) Incorporated by reference to Exhibit 4(n) of Form 8-K on June 11, 1997. (10d) Incorporated by reference to Exhibit 4(o) of Form 8-K filed on June 11, 1997. (11) Incorporated by reference to Exhibit number 10.2 of Registration Statement No. 33-00497. (12) Incorporated by reference to Exhibit 10.13 of the 1991 Form 10-K. (13) Incorporated by reference to Exhibit 10.8.1 of the 1994 Form 10-K. 19 52 (14) Incorporated by reference to Exhibit 10.9 of the 1996 Form 10-K. (15) Incorporated by reference to Exhibit 10.14 of the 1992 Form 10-K. (16) Incorporated by reference to Exhibit 10.12.2 of the 1994 Form 10-K. (17) Incorporated by reference to Exhibit 10.13 of the 1996 Form 10-K. (18) Incorporated by reference to Exhibit 10.14 of the 1996 Form 10-K. 20 53 POPULAR, INC. INDEX FINANCIAL DATA
Page FINANCIAL REVIEW AND SUPPLEMENTARY INFORMATION Management's Discussion and Analysis of Financial Condition and Results of Operations ..................................................................................... F-2 Statistical Summaries ...................................................................................... F-30 Glossary of Terms .......................................................................................... F-35 FINANCIAL STATEMENTS Report of Independent Accountants .......................................................................... F-37 Consolidated Statements of Condition as of December 31, 1997 and 1996 ...................................... F-38 Consolidated Statements of Income for each of the years in the three-year period ended December 31, 1997 ......................................................................................... F-39 Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 1997 ......................................................................................... F-40 Consolidated Statements of Changes in Stockholders' Equity for each of the years in the three-year period ended December 31, 1997 ............................................................................ F-41 Notes to Consolidated Financial Statements ................................................................. F-42
F-1 54 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This financial discussion contains an analysis of the consolidated financial position and financial performance of Popular, Inc. (formerly BanPonce Corporation) and its subsidiaries (the Corporation) and should be read in conjunction with the consolidated financial statements, notes and tables included elsewhere in this report. The Corporation is a bank holding company which offers a wide range of products and services through its subsidiaries and is engaged in the following businesses: - Commercial Banking/Savings and Loans - Banco Popular de Puerto Rico (BPPR), Banco Popular, N.A (California), Banco Popular, N.A. (Florida), Banco Popular, Illinois, Banco Popular, FSB and Banco Popular, N.A. (Texas) - Lease Financing - Popular Leasing and Rental, Inc. (Popular Leasing) and Popular Leasing, U.S.A. - Mortgage Banking/Consumer Finance - Popular Mortgage, Inc. (d/b/a Popular Home Mortgage), Equity One, Inc. (Equity One) and Popular Finance, Inc. (Popular Finance) - Broker/Dealer - Popular Securities, Incorporated (Popular Securities) - ATM Processing Services - ATH Costa Rica OVERVIEW During 1997, the U.S. economy expanded at a strong pace which reduced the unemployment rate to cyclical lows, but inflation continued its extraordinary performance. Gross domestic product increased 3.8% in 1997, which is a rate of growth considered by many economists to be above the economy's long-term potential growth rate. The unemployment rate declined to 4.7% in December 1997, as the economy generated 3.2 million new jobs. Despite the strong performance of the economy, inflation as measured by the Consumer Price Index, rose 1.7%, the lowest rate since 1986, which was affected to a large extent by a sharp drop in oil prices that year. Prices at the wholesale level actually reflected deflation, as the Producer Price Index declined 1.2% during 1997. Due to the strength of the economy, particularly early in the year, the Federal Reserve increased the federal funds rate by 25 basis points in March 1997, with the objective of prolonging the economic expansion and restraining possible inflationary pressures. Despite continued strong economic growth during the remainder of the year, monetary policy was kept unchanged. It is possible that increasing levels of productivity in the American economy together with intense competition in many markets due to the increasing globalization of many industries, discouraged any further changes in monetary policy. The financial markets incorporated this "new" approach to monetary policy in the yield curve, by reducing sharply the general level of interest rates during the last three quarters of the year. The yield of Treasury obligations maturing in two and thirty years declined to 5.65% and 5.92%, respectively. This decline was intensified by the financial crisis in Asia, which introduced expectations of a world-wide slowdown in economic growth. The Corporation's performance for 1997 was highlighted by the investment in crucial strategic initiatives aimed at creating shareholder value and increase earnings as well as successfully integrating the acquired operations. In the annual stockholders meeting on April 25, 1997, the Corporation's shareholders approved the change of the Corporation's name to Popular, Inc. as a corporate strategy of marketing and identification of its subsidiaries. As part of this strategy, the banking subsidiaries changed their name to Banco Popular and an institutional campaign was launched in the continental U.S. emphasizing the Bank's strength and history as well as its strong Hispanic ties. Other non-banking subsidiaries previously known as Puerto Rico Home Mortgage, BP Capital Markets and Popular Consumer Services (d/b/a Best Finance) changed their names to Popular Home Mortgage, Popular Securities and Popular Finance, respectively. In an effort to continue providing banking services at customers' convenience, BPPR launched its innovative "PC Bank" in Puerto Rico. This new product, which is available 24 hours a day, allows customers to obtain balances of their deposit accounts, credit cards and loans through their personal computer from the privacy of their home or office. Likewise, clients are able to verify their most recent transactions, perform payments and transfers within the accounts and communicate with the bank through electronic mail. During the second quarter of 1997, the Corporation acquired Seminole National Bank in Sanford, Florida. Seminole National Bank operated three branches in Sanford and Orlando. In Illinois, the Corporation acquired National Bancorp, Inc. and CBC Bancorp, Ltd. National Bancorp, Inc. was the holding company of American Midwest Bank and Trust, which operated two branches in Chicago, while CBC Bancorp had two banking subsidiaries, Capitol Bank & Trust and Capitol Bank of Westmont which operated three branches. Those three banking operations were subsequently consolidated with Banco Popular, Illinois. Moreover, in Puerto Rico, the Corporation completed the acquisition of Roig Commercial Bank (RCB) on June 30, 1997, with its branch F-2 55 TABLE A Components of Net Income as a Percentage of Average Total Assets
For the Year - ------------------------------------------------------------------------------------------------------------------------------ 1997 1996 1995 1994 1993 --------------------------------------------------------------- Net interest income ...................................... 4.26% 4.18% 4.14% 4.38% 4.61% Provision for loan losses ................................ (0.60) (0.54) (0.46) (0.44) (0.68) Securities and trading gains ............................. 0.03 0.02 0.05 0.01 Other income.............................................. 1.31 1.24 1.18 1.15 1.16 --------------------------------------------------------------- 5.00 4.90 4.91 5.09 5.10 Operating expenses........................................ (3.46) (3.33) (3.45) (3.66) (3.86) --------------------------------------------------------------- Net income before tax, dividends on preferred stock of BPPR and cumulative effect of accounting changes .... 1.54 1.57 1.46 1.43 1.24 Provision for income tax.................................. (0.40) (0.43) (0.42) (0.41) (0.26) --------------------------------------------------------------- Net income before dividends on preferred stock of BPPR and cumulative effect of accounting changes...................................... 1.14 1.14 1.04 1.02 0.98 Dividends on preferred stock of BPPR...................... (0.01) Cumulative effect of accounting changes................... 0.05 --------------------------------------------------------------- Net income................................................ 1.14% 1.14% 1.04% 1.02% 1.02% =============================================================== - ------------------------------------------------------------------------------------------------------------------------------
network of 25 branches mostly located in the eastern part of the island. In September, BPPR completed the integration of RCB branches and products. Eight branches were consolidated into existing BPPR branches and the remaining 17 are strengthening BPPR's retail network, particularly in the eastern end of the island, and are providing additional services and convenience to our customers. Also, during the second quarter, ATH Costa Rica began operations. It is the first automated teller machine (ATM) network in that country. ATH Costa Rica and three banking institutions in Costa Rica joined and currently operate 18 ATMs providing their customers with access to ATMs in Puerto Rico and the United States, and vice-versa. To enhance the Corporation's ability to secure financing in the U.S. money and capital markets a shelf registration was filed with the Securities and Exchange Commission. Under this registration, which became effective on May 22, 1997, the Corporation may issue unsecured debt securities or shares of preferred stock in an aggregate amount of up to $1 billion. As of December 31, 1997, the Corporation had issued $230 million in medium-term notes under this shelf registration. On December 1, 1997, the Corporation acquired Houston Bancorporation, the holding company of Citizens National Bank which operated one branch in Houston, Texas. This acquisition emphasizes the Corporation's objective to create a wide customer base in markets with a sizable Hispanic population in order to build a nationwide network and brand that will provide more convenience to its customers and growth opportunities for the Corporation. During 1997, other established operations of the Corporation continued expanding as Banco Popular, N.A. (Florida) opened three new branches during its first year, for a total of six branches in that state. As of December 31, 1997, in addition to the six branches in Florida, the Corporation operated 29 bank branches in New York, 13 in Illinois, eight in New Jersey, six in California and one in Texas, for a total of 63 branches in the continental U.S. In Puerto Rico and the Virgin Islands, BPPR opened five full-service branches and six in-store branches during this year, for a total of 209 branches, while Equity One opened 15 new offices in the mainland for a total of 117 offices in 30 states. BPPR continued to accomplish a significant progress towards its electronic initiatives as the number of POS transactions rose 51.3% from 3.2 million in December 1996 to 4.9 million in December 1997, while 4,929 POS terminals were installed during the year. F-3 56 TABLE B Selected Financial Data
----------------------------------------- (Dollars in thousands, except per share data) 1997 1996 1995 ----------------------------------------- CONDENSED INCOME STATEMENTS Interest income ........................................... $ 1,491,303 $ 1,272,853 $ 1,105,807 Interest expense .......................................... 707,348 591,540 521,624 ----------------------------------------- Net interest income .................................... 783,955 681,313 584,183 Securities and trading gains .............................. 6,202 3,202 7,153 Operating income .......................................... 241,396 202,270 166,185 Operating expenses ........................................ 636,920 541,919 486,833 Provision for loan losses ................................. 110,607 88,839 64,558 Income tax ................................................ 74,461 70,877 59,769 Dividends on preferred stock of BPPR ...................... Cumulative effect of accounting changes ................... ----------------------------------------- Net income ............................................. $ 209,565 $ 185,150 $ 146,361 ========================================= Net income applicable to common stock .................. $ 201,215 $ 176,800 $ 138,011 ========================================= PER COMMON SHARE DATA* Net income ................................................ $ 3.00 $ 2.68 $ 2.10 Dividends declared ........................................ 0.80 0.69 0.58 Book value ................................................ 20.73 17.59 15.81 Market price .............................................. 49.50 33.75 19.38 Outstanding shares: Average ............................................... 67,018,482 66,022,312 65,816,300 End of period ......................................... 67,682,704 66,088,506 65,897,272 AVERAGE BALANCES Net loans ................................................. $10,548,207 $ 9,210,964 $ 8,217,834 Earning assets ............................................ 17,409,634 15,306,311 13,244,170 Total assets .............................................. 18,419,144 16,301,082 14,118,183 Deposits .................................................. 10,991,557 10,461,796 9,582,151 Subordinated notes ........................................ 125,000 147,951 56,850 Total stockholders' equity ................................ 1,370,984 1,194,511 1,070,482 PERIOD END BALANCES Net loans ................................................. $11,376,607 $ 9,779,028 $ 8,677,484 Allowance for loan losses ................................. 211,651 185,574 168,393 Earning assets ............................................ 18,060,998 15,484,454 14,668,195 Total assets .............................................. 19,300,507 16,764,103 15,675,451 Deposits .................................................. 11,749,586 10,763,275 9,876,662 Subordinated notes ........................................ 125,000 125,000 175,000 Preferred beneficial interests in Popular North America's junior subordinated deferrable interest debentures guaranteed by the Corporation ........................... 150,000 Total stockholders' equity ................................ 1,503,092 1,262,532 1,141,697 SELECTED RATIOS Net interest yield (taxable equivalent basis) .............. 4.84% 4.77% 4.74% Return on average total assets ............................. 1.14 1.14 1.04 Return on average common stockholders' equity .............. 15.83 16.15 14.22 Dividend payout ratio to common stockholders ............... 25.19 24.63 26.21 Efficiency ratio ........................................... 62.12 61.33 64.88 Overhead ratio ............................................. 49.66 49.38 53.66 Tier I capital to risk-adjusted assets ..................... 12.17 11.63 11.91 Total capital to risk-adjusted assets ...................... 14.56 14.18 14.65
* Per share data is based on the average number of shares outstanding during the periods, except for the book value which is based on total shares at the end of the periods. All per share data has been adjusted to reflect two stock splits effected in the form of a dividend on July 1, 1996 and on April 3, 1989. F-4 57
Year ended December 31, - ----------------------------------------------------------------------------------------------------- 1994 1993 1992 1991 1990 1989 1988 - ----------------------------------------------------------------------------------------------------- $ 887,141 $ 772,136 $ 740,354 $ 794,943 $ 565,807 $ 558,273 $ 488,200 351,633 280,008 300,135 387,134 281,561 302,747 261,316 - ----------------------------------------------------------------------------------------------------- 535,508 492,128 440,219 407,809 284,246 255,526 226,884 451 1,418 625 19,376 91 2,529 689 140,852 123,762 123,879 112,398 70,865 59,550 53,025 447,846 412,276 366,945 345,738 229,563 207,376 190,862 53,788 72,892 97,633 121,681 53,033 42,603 34,750 50,043 28,151 14,259 6,793 9,240 11,456 7,844 385 770 770 807 6,185 - ----------------------------------------------------------------------------------------------------- $ 124,749 $ 109,404 $ 85,116 $ 64,564 $ 63,366 $ 56,170 $ 47,142 ===================================================================================================== $ 120,504 $ 109,404 $ 85,116 $ 64,564 $ 63,366 $ 56,170 $ 47,142 ===================================================================================================== $ 1.84 $ 1.67 $ 1.40 $ 1.07 $ 1.57 $ 1.40 $ 1.18 0.50 0.45 0.40 0.40 0.40 0.40 0.34 13.74 12.75 11.52 10.50 9.83 9.38 8.38 14.07 15.50 15.13 9.63 8.00 10.75 8.88 65,596,486 65,402,472 60,922,988 60,071,202 40,233,940 40,028,026 40,000,000 65,676,256 65,464,846 65,309,728 60,187,704 59,884,812 40,074,792 40,000,000 $ 7,107,746 $ 5,700,069 $ 5,150,328 $ 5,302,189 $ 3,377,463 $ 3,132,167 $ 2,869,829 11,389,680 9,894,662 8,779,981 8,199,195 5,461,938 5,318,800 5,182,535 12,225,530 10,683,753 9,528,518 8,944,357 5,836,749 5,676,981 5,523,823 8,837,226 8,124,885 7,641,123 7,198,187 5,039,422 4,782,791 4,571,456 56,082 73,967 85,585 94,000 50,000 38,082 119 924,869 793,001 668,990 610,641 407,611 353,844 317,001 $ 7,781,329 $ 6,346,922 $ 5,252,053 $ 5,195,557 $ 5,365,917 $ 3,276,389 $ 3,056,761 153,798 133,437 110,714 94,199 89,335 40,896 33,244 11,843,806 10,657,994 9,236,024 8,032,556 8,219,279 5,469,921 5,221,873 12,778,358 11,513,368 10,002,327 8,780,282 8,983,624 5,923,261 5,661,398 9,012,435 8,522,658 8,038,711 7,207,118 7,422,711 4,926,304 4,715,837 50,000 62,000 74,000 94,000 94,000 50,000 1,002,423 834,195 752,119 631,818 588,884 375,807 334,867 5.06% 5.50% 6.11% 5.97% 6.30% 5.57% 5.10% 1.02 1.02 0.89 0.72 1.09 0.99 0.85 13.80 13.80 12.72 10.57 15.55 15.87 14.87 27.20 25.39 28.33 34.13 25.33 28.14 28.00 66.21 66.94 65.05 66.46 64.65 65.82 68.19 57.24 58.34 55.07 52.47 55.80 56.86 60.45 12.85 12.29 12.88 11.01 10.10 9.47 9.19 14.25 13.95 14.85 13.35 12.74 11.76 10.10
F-5 58 TABLE C Changes in Net Income and Earnings per Common Share
1997 1996 1995 - -------------------------------------------------------------------------------------------------------------------------------- (In thousands, except per common share amounts) DOLLARS PER SHARE Dollars Per share Dollars Per share -------------------------------------------------------------------------- Net income applicable to common stock for prior year................................... $176,800 $2.68 $138,011 $2.10 $120,504 $1.84 Increase (decrease) from changes in: Net interest income.............................. 102,642 1.55 97,130 1.48 48,675 0.74 Other operating income........................... 39,126 0.59 36,085 0.55 25,333 0.38 Trading account profit........................... 3,826 0.06 (1,677) (0.03) 1,558 0.02 Gain on sale of investment securities............ (826) (0.01) (2,274) (0.03) 5,144 0.08 Dividends on preferred stock of BPPR............. 385 0.01 Income tax....................................... (3,584) (0.05) (11,108) (0.17) (9,726) (0.15) Provision for loan losses........................ (21,768) (0.33) (24,281) (0.37) (10,770) (0.16) Operating expenses............................... (95,001) (1.44) (55,086) (0.84) (38,987) (0.59) -------------------------------------------------------------------------- Subtotal......................................... 201,215 3.05 176,800 2.69 142,116 2.17 Dividends declared on preferred stock............ (4,105) (0.06) Change in average common shares* ................ (0.05) (0.01) (0.01) -------------------------------------------------------------------------- Net income applicable to common stock ............. $201,215 $3.00 $176,800 $2.68 $138,011 $2.10 ==========================================================================
* Reflects the effect of the issuance of shares of common stock for the acquisitions completed in 1997, net of the shares repurchased during 1997, plus the shares issued through the Dividend Reinvestment Plan in the years presented. The average common shares outstanding for the years presented above were 67,018,482 for 1997, 66,022,312 for 1996 and 65,816,300 for 1995, after restating for the stock split effected in the form of a dividend of one share for each share outstanding on July 1, 1996. Besides investing in strategic initiatives, the Corporation's net income was $209.6 million for 1997, showing a $24.4 million increase or 13.2% over the $185.2 million reported in 1996. Earnings per common share (EPS) for the year ended 1997 were $3.00, or 11.9% higher than the $2.68 reported for 1996. The Corporation's profitability ratios for 1997 represented returns of 1.14% on assets (ROA) and 15.83% on common stockholders' equity (ROE), compared with an ROA and ROE of 1.14% and 16.15%, respectively in 1996. Table A presents a five-year summary of the components of net income as a percentage of average assets. The earnings performance reflected an increase in net interest income of $102.6 million due to the growth of $2.1 billion in the average volume of earning assets, driven by a $1.3 billion increase in average loans, as well as a higher fully taxable equivalent net interest margin of 4.84%, up from 4.77% in 1996. Significant growth was also experienced in several other operating income categories such as service charges on deposit accounts which grew $8.3 million, other service fees which increased $21.6 million, trading account profit which grew $3.8 million and other operating income which increased $9.3 million. These factors served to offset the impact of increases of $21.8 million in the provision for loan losses and $95.0 million in operating expenses. The provision for loans losses rose $21.8 million from $88.8 million in 1996 to $110.6 million in 1997 as a result of the growth in the loan portfolio, and higher delinquency and net charge-offs. Net charge-offs rose from $72.1 million or 0.78% of average loans in 1996 to $97.8 million or 0.93% of average loans in 1997, particularly in the consumer and commercial loan portfolios. This increase is due to the recent deterioration in the credit conditions highlighted by the rise in personal bankruptcies. In Puerto Rico, the number of personal bankruptcies filed during 1997 amounted to 15,636 for a 44.9% increase over the 10,792 filed in 1996. Operating expenses totaled $636.9 million in 1997, as compared with $541.9 million in 1996, reflecting rises of $33.6 million in personnel expenses, $9.3 million in equipment expenses, $7.3 million in business promotion and $9.9 million in other operating expenses. The increase in operating expenses was attributed to increased staffing resulting from acquisitions and strategic initiatives, growth of the Corporation's business activities, increased spending on projects to enhance revenue growth as well as optimizing product delivery channels. In addition, operating expenses for 1997 include some costs pertaining to the Year 2000. The Corporation has approached this project creating a company-wide task force and establishing a formal plan, closely monitored by its Senior Management. F-6 59 Total assets at December 31, 1997, amounted to $19.3 billion, including $18.1 billion of interest earning assets of which $11.4 billion were loans. These amounts compare with $16.8 billion, $15.5 billion and $9.8 billion, respectively, a year earlier. Also, reflecting the Corporation's emphasis on building diverse and stable sources of funding to strengthen its operations and sustain future growth, total deposits increased to $11.7 billion from $10.8 billion a year ago. Borrowings rose $1.1 billion, from $4.4 billion in 1996, partially as a result of the repeal of Section 936 of the U.S. Internal Revenue Code, during the third quarter of 1996. Section 936 provided certain U.S. corporations operating on the Island with a tax credit against its federal tax liability on income derived from business operations and investment activity in Puerto Rico. The bill approved repealed the Qualified Possession Source Investment Income (QPSII) credit effective July 1, 1996, for taxable years beginning after December 31, 1995, while the income and the wage credits will be phased out in 10 years. As expected, the repeal of this section caused a reduction in the volume of funds from former 936 corporations from $2.1 billion in 1996 to $1.8 billion in 1997. The Corporation's stockholders' equity reached $1.50 billion at December 31, 1997, compared with $1.26 billion at December 31, 1996. A total of 2,462,272 shares were issued during 1997, in connection with the acquisitions of National Bancorp, Inc. and RCB. On May 8, 1997, the Board of Directors approved a stock repurchase program of up to 3 million shares of the outstanding common stock of the Corporation. As of December 31, 1997, the Corporation had purchased 988,800 shares under this program at a total cost of $39.6 million. The Corporation's regulatory capital ratios continued to exceed the well-capitalized guidelines with a Tier I ratio of 12.17%, a total capital ratio of 14.56% and a leverage ratio of 6.86% at December 31, 1997, compared with 11.63%, 14.18% and 6.71%, respectively, a year earlier. On February 5, 1997, the Corporation sold to institutional investors $150 million of capital securities. BanPonce Trust I, a statutory business trust owned by Popular North America, Inc., issued $150 million of Capital Securities Series A at a rate of 8.327%, fully guaranteed by Popular North America, Inc. and Popular, Inc. The proceeds were upstreamed to Popular North America, Inc. as junior subordinated debt under the same terms and conditions. Cumulative preferred securities having the characteristics of the Series A Capital Securities, as defined by the Federal Reserve, qualify as Tier I capital for bank holding companies. Such Tier I capital treatment provides the Corporation with a cost-effective mean of obtaining capital for regulatory purposes. The Corporation's common stock appreciated 46.7% during 1997, to a market price of $49.50 at December 31, 1997, from $33.75 at the same date in 1996. The total return on the common stock of Popular, Inc., including price appreciation and dividends, was 50.3% for 1997. Further discussion of operating results and the Corporation's financial condition is presented in the following narrative and tables. In addition, Table B provides selected financial data for the last 10 years. EARNINGS ANALYSIS NET INTEREST INCOME The principal source of earnings of the Corporation, represents the excess of the interest earned on earning assets over the interest paid on rate-related liabilities. As further discussed in the Risk Management section, the Corporation constantly monitors the composition and repricing of its assets and liabilities to maintain its net interest income at adequate levels and to avoid undertaking highly sensitive positions that could affect its earnings capacity in a volatile interest rate environment. Net interest income reached $784.0 million for the year ended December 31, 1997, $102.7 million higher than the $681.3 million reported for the same period in 1996. In 1995, net interest income was $584.2 million. To enhance the comparability of assets with different tax attributes, the interest income on tax exempt assets has been adjusted by an amount equal to the net income taxes which would have been paid had the income been fully taxable. This tax-equivalent adjustment is derived using the applicable statutory tax rates and resulted in an amount of $58.9 million in 1997, $48.1 million in 1996 and $44.0 million in 1995. For the year ended December 31, 1997, net interest income, on a taxable equivalent basis, was $842.9 million or 15.6% higher than the $729.4 million reported in 1996. This figure amounted to $628.2 million in 1995. The increase was mostly related to a higher volume in earning assets, partially offset by a higher volume of interest bearing liabilities, accounting for $101.5 million of the increase, while a higher net interest margin on a taxable equivalent basis, was responsible for the remaining $12.0 million. F-7 60 TABLE D Net Interest Income - Taxable Equivalent Basis
Year ended December 31, - ----------------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) 1997 1996 1995 1994 1993 ----------------------------------------------------------------------------------------------------------- AVERAGE Average Average Average Average BALANCE RATE Balance Rate Balance Rate Balance Rate Balance Rate ------------------------------------------------------------------------------------------------------------- Earning assets....... $17,409,634 8.90% $15,306,311 8.63% $13,244,170 8.68% $11,389,680 8.15% $9,894,662 8.33% ============================================================================================================= Financed by: Interest bearing funds ... $14,572,317 4.85% $12,778,488 4.63% $10,991,569 4.75% $ 9,330,837 3.77% $8,097,004 3.46% Non-interest bearing funds ... 2,837,317 2,527,823 2,252,601 2,058,843 1,797,658 ------------------------------------------------------------------------------------------------------------- Total.......... $17,409,634 4.06% $15,306,311 3.86% $13,244,170 3.94% $11,389,680 3.09% $9,894,662 2.83% ============================================================================================================= Net interest income.. $ 842,938 $ 729,438 $ 628,233 $ 576,575 $ 544,471 ============================================================================================================= Spread ............. 4.05% 4.00% 3.93% 4.38% 4.87% Net interest yield... 4.84 4.77 4.74 5.06 5.50
Note: See five-year statistical summary on page F-32 and F-33 for a more detailed information on the components of net interest income. Table D presents a comparative analysis of the net interest income and rates, on a taxable equivalent basis, for the past five years and Table E presents an analysis of the major categories of earning assets and rate-related liabilities and their impact on the net interest income variances due to changes in volumes and rates for the last two years. Average earning assets increased to $17.4 billion compared with $15.3 billion in 1996 and $13.2 billion in 1995. The principal contributor to the increase in average earning assets was the rise of $1.3 billion in average loans followed by an increase of $1.1 billion in investment securities that was partially offset by a lower balance of both money market investments and trading account securities. Average loans reached $10.5 billion, compared with $9.2 billion reported in 1996, a 14.5% increase. Average loans is the largest asset category of the Corporation accounting for 60.6% of its total average earning assets in 1997 and 60.2% in 1996. As Table E shows, the additional loan volume was the main contributor to the rise in interest income of the Corporation in 1997. Aside from the growth in average loans at BPPR and Equity One due to the expansion of their operations, the rise in average loans relates to the acquisitions made during 1997, primarily RCB which contributed $358 million in loans at June 30, 1997, CBC Bancorp, Ltd and National Bancorp, which contributed $194 million and $68 million, respectively, at May 31, 1997. The increase in average loans was mainly attained in commercial and consumer loans, which increased $740 million and $397 million, respectively, primarily due to the business expansion and the aforementioned acquisitions. Average mortgage loans rose $151 million mainly in the United States and the leasing portfolio increased by $49 million. The average yield on loans, on a taxable equivalent basis, for the year ended December 31, 1997, was 10.31% compared with 10.11% in 1996 and 9.98% in 1995. The principal contributor to the rise in the yield on loans was the commercial loan portfolio, which increased by 28 basis points, reaching an average yield of 9.26% compared with 8.98% in 1996. The higher interest rate scenario that prevailed during 1997 compared with 1996, and the fact that some loans that were previously priced using a 936 market rate as a factor, have changed their pricing to a higher rate in accordance with the conventional funds market, were the predominant factors for the improvement in this yield. The yield on consumer loans for 1997 also improved to 13.07%, 22 basis points higher than the 12.85% reported for 1996, mostly due to changes made in the pricing structure of some consumer loan products at BPPR. The yield on mortgage loans, on a taxable equivalent basis, for the year ended December 31, 1997, was 8.54% compared with 8.51% for 1996. Investment securities averaged $5.9 billion in 1997, compared with $4.8 billion in 1996. This rise was principally attained at BPPR mainly in U.S. Treasury and Agency securities. This increase was largely related to arbitrage activities performed during the year which were profitable for the Corporation due to the prevailing interest rates and the tax-favored status of these invest- F-8 61 TABLE E Interest Variance Analysis - Taxable Equivalent Basis
1997 VS. 1996 1996 vs. 1995 - --------------------------------------------------------------------------------------------------------------------------- (In thousands) INCREASE (DECREASE) DUE TO CHANGE IN: Increase (Decrease) Due to Change in: --------------------------------------------------------------------------------- VOLUME RATE TOTAL Volume Rate Total --------------------------------------------------------------------------------- Interest income: Federal funds sold and securities and mortgages purchased under agreements to resell .......... $ (13,917) $ 1,131 $ (12,786) $ 25,661 $ (2,175) $ 23,486 Time deposits with other banks .. 26 (13) 13 122 12 134 Investment securities ........... 75,292 13,448 88,740 26,217 (2,777) 23,440 Trading securities .............. (4,562) 1,328 (3,234) 13,392 (219) 13,173 Loans ........................... 143,007 13,567 156,574 103,667 7,221 110,888 -------------------------------------------------------------------------------- Total interest income ......... 199,846 29,461 229,307 169,059 2,062 171,121 -------------------------------------------------------------------------------- Interest expense: Savings, NOW and money market accounts ..... 14,273 1,547 15,820 7,666 (2,715) 4,951 Other time deposits ............. (4,625) 5,112 487 24,119 (8,632) 15,487 Short-term borrowings ........... 42,987 10,069 53,056 48,288 (5,128) 43,160 Long-term borrowings ............ 45,681 764 46,445 17,189 (10,871) 6,318 -------------------------------------------------------------------------------- Total interest expense ........ 98,316 17,492 115,808 97,262 (27,346) 69,916 -------------------------------------------------------------------------------- Net interest income ............... $ 101,530 $ 11,969 $ 113,499 $ 71,797 $ 29,408 $ 101,205 =================================================================================
Note: The changes that are not due solely to volume or rate are allocated to volume and rate based on the proportion of the change in each category. ments. The interest income derived on U.S. Government Obligations is exempt for income tax purposes in Puerto Rico. The taxable equivalent yield of investment securities improved to 6.90% compared with 6.63% reported in 1996. This rise is mainly related to the higher interest rate scenario that prevailed during the year as compared with 1996. Average money market investments decreased $261 million to $632 million, compared with $893 million in 1996. The decrease relates mainly to a reduction in eligible activities at Popular Securities, due to a lower balance of funds from former 936 corporations. The average yield on these money market investments for 1997 was 5.36%, or 13 basis points higher than the 5.23% reported during 1996, principally affected by the interest rate environment. The decrease in the average balance of trading account securities of $71 million was also caused by the lower balance of these assets at Popular Securities when compared with 1996. The taxable equivalent yield on trading account securities for the years ended December 31, 1997 and 1996 were 6.55% and 6.18%, respectively. As shown in Table E, the increase in the taxable equivalent yield on investment securities, money market and trading account, as well as the increase in the average yield on loans, contributed to the rise in interest income resulting from changes in rates. For the year ended December 31, 1997, the yield on earning assets, on a taxable equivalent basis, was 8.90% versus 8.63% for 1996, an improvement of 27 basis points. On the liability side, the average balance of interest-bearing liabilities reached $14.6 billion in 1997, $1.8 billion higher than the $12.8 billion reported during 1996. Short-term borrowings increased $816 million, medium and long term debt rose $688 million and interest bearing deposits rose $290 million. The increase in the average balance of short-term borrowings was mostly to offset the reduction of $511 million in average 936 deposits at BPPR and to arbitrage opportunities. The average cost of short-term borrowings increased to 5.55% compared with 5.33% reported in 1996, mainly as a result of the market conditions that prevailed in 1997. Average interest-bearing deposits increased $290 million or 3.4%, from $8.4 billion reported in 1996 to $8.7 billion in 1997, while average demand deposits increased $240 million or 11.7% to $2.3 billion. Savings accounts were the main contributor to the rise, increasing $297 million, followed by NOW and money market deposits which rose $133 million. On the other hand, time deposits decreased by $140 million due to the reduction of $511 million in average 936 deposits, offset by rises in individual and F-9 62 corporate deposits of $371 million. The acquisition of banking operations in the mainland during 1997, contributed $264 million in average deposits, while RCB contributed $584 million at acquisition date. Table M has a detail of average deposits by category. The average cost of interest-bearing deposits increased four basis points to 4.21%, compared with 4.17% reported in 1996. The rise is principally attributed to the increase of 20 basis points in the average cost of certificates of deposit that reached 5.45%. Traditionally certificates of deposit from former 936 corporations had a cost below the U.S. market or the Eurodollar market. These deposits had an average cost of 4.88% and comprised 5.8% of the total average interest bearing deposits in 1997, compared with 4.55% and 12.1% in 1996. The reduction in the proportion of deposits from former 936 corporations as well as the increase in their cost were determinant factors for the increase in the average cost of certificates of deposit. The average cost of NOW and money market deposits increased from 3.28% in 1996 to 3.35% in 1997, while the average cost of savings accounts increased five basis points to 3.08% from 3.03% in 1996. Average medium and long-term debt increased $688 million, reaching $1.6 billion and its related cost increased from 6.25% reported in 1996 to 6.47% in 1997. The increase in the average cost is principally due to debt issued in 1997 during a higher interest rate environment and debt with floating interest rates resetting semiannually or quarterly. The average cost of interest-bearing liabilities increased 22 basis points, from 4.63% in 1996 to 4.85% in 1997, while the cost of funding earning assets increased from 3.86% to 4.06% in 1997. Although the yield on earning assets and the cost of interest bearing liabilities increased by 27 and 22 basis points, respectively, the higher proportion of non interest-bearing liabilities, such as demand deposits and other funding sources, to average earning assets allowed the Corporation to improve its net interest margin, on a taxable equivalent basis, by seven basis points to 4.84% for 1997 as compared with 4.77% reported in 1996. PROVISION FOR LOAN LOSSES The provision for loan losses reflects management's assessment of the adequacy of the allowance for loan losses to cover potential losses inherent in the loan portfolio after taking into account the net charge-offs for the current period and loan impairment. The provision for loan losses was $110.6 million for 1997, compared with $88.8 million in 1996, an increase of $21.8 million or 24.5%. The provision for loan losses for 1995 was $64.6 million. The growth in the loan portfolio, and the increase in net charge-offs and non-performing assets experienced by the Corporation were responsible for the increase in the provision. Net charge-offs for the year ended December 31, 1997, were $97.8 million or 0.93% of average loans, compared with $72.1 million or 0.78% in 1996 and $50.0 million or 0.61% in 1995. The increase in net charge-offs was mostly reflected in the consumer and commercial portfolios. The net charge-offs of consumer loans amounted to $50.5 million compared with $29.1 million a year earlier and commercial loans rose $10.8 million in net charge-offs during 1997. Lease financing and construction loans net charge-offs decreased $5.2 million and $1.7 million, respectively, when compared with the year ended December 31, 1996. Mortgage loans net charge-offs amounted to $2.3 million and $1.9 million in 1997 and 1996, respectively. Please refer to the Credit Risk Management and Loan Quality section for a more detailed analysis of the allowance for loan losses, net charge-offs, and credit quality statistics. NON-INTEREST INCOME Non-interest income, which consists primarily of service charges on deposit accounts, credit and debit card fees, other fee-based services and other revenues, rose $39.1 million or 19.3% to $241.4 million in 1997, from $202.3 million in 1996. In 1995, these revenues totaled $166.2 million. The rise in non-interest income was mainly the result of the Corporation's continuing efforts of expanding the range of services offered to customers and building more customer relationships, taking advantage of its technological leadership in the Island and its continued expansion. Accordingly, each year non-interest income has become a more important contributor to the growth in the Corporation's revenues. F-10 63 TABLE F Other Operating Income
Year ended December 31, - ----------------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) Five-Year 1997 1996 1995 1994 1993 C.G.R. - ----------------------------------------------------------------------------------------------------------------------------------- Service charges on deposit accounts..... $ 94,141 $ 85,846 $ 78,607 $ 71,727 $ 68,246 8.34% --------------------------------------------------------------------------------------- Other service fees: Credit card fees and discounts....... 31,371 23,735 20,676 18,620 16,818 13.31 Other fees........................... 17,676 15,859 17,052 15,896 13,135 5.80 Debit card fees...................... 15,957 10,430 5,425 3,185 1,704 60.53 Sale and administration of investment products ............. 9,478 5,384 2,999 1,190 Mortgage servicing fees, net of amortization...................... 9,357 7,534 5,956 2,301 2,936 24.14 Credit life insurance fees........... 7,602 7,955 5,766 4,889 4,270 18.26 Trust fees........................... 7,209 6,174 5,851 5,159 4,084 10.36 --------------------------------------------------------------------------------------- Total other service fees.... 98,650 77,071 63,725 51,240 42,947 18.35 --------------------------------------------------------------------------------------- Other income............................ 48,605 39,353 23,853 17,885 12,569 21.54 Total....................... $241,396 $202,270 $166,185 $140,852 $123,762 14.27% ======================================================================================= Other operating income to average assets.................... 1.31% 1.24% 1.18% 1.15% 1.16% Other operating income to operating expenses................ 37.90 37.32 34.14 31.45 30.02
The growth during 1997 was driven by increases of $21.6 million in other service fees, $9.3 million in other income and $8.3 million in service charges on deposit accounts. As shown in Table F, those increases helped to improve the ratio of non-interest income to average assets from 1.24% in 1996, to 1.31%. In 1995, this ratio was 1.18%. The ratio of non-interest income to operating expenses also increased from 37.32% in 1996 to 37.90% in 1997. Service charges on deposit accounts grew to $94.1 million for the year ended December 31, 1997, from $85.8 million in 1996 and $78.6 million in 1995. This rise mostly resulted from the growth in the activity of commercial accounts, particularly at BPPR, and a higher volume of deposits driven by the acquisition of RCB and the operations acquired in the U.S. during 1997. Measured as a percentage of average deposits, service charges were 0.86% in 1997, compared with 0.82% in 1996 and 1995. Other service fees, which represented 40.9% of non-interest income for the year, increased $21.6 million or 28.0%, from $77.1 million in 1996 to $98.7 million in 1997. The growth in other service fees was the result of higher credit card fees and merchant discounts by $7.6 million and higher debit card fees by $5.5 million. This increase was principally attained at BPPR, where credit card fees and discounts rose $5.6 million, as credit card net sales rose 33.3% and the number of active credit card accounts grew 18.8%. Also, debit card fees which consist primarily of rental income of point-of-sale (POS) terminals and interchange income rose $5.4 million at BPPR. This increase is in line with the growth of 54.8% in the volume of transactions at POS terminals from a monthly average of approximately 2,048,000 in December 1996 to 3,171,000 a year later. The number of POS terminals, from which rental income is derived, increased 43.3% to 16,321 as of December 31, 1997, from 11,392 a year earlier. The expanded sale and administration of investment products such as mutual funds contributed an additional $4.1 million, mainly as a result of the fees earned by the new retail division of Popular Securities which started operations at the end of the second quarter of 1997. Other operating income for the year ended December 31, 1997, increased to $48.6 million from $39.3 million reported in 1996 and $23.9 million reported in 1995. This increase resulted mainly from higher pre-tax gains of $8.4 million on the sale of mortgage loans during 1997 compared with 1996, related to the Corporation's mortgage banking activities. Also in 1997, there was a growth in other income due to the write-off in 1996 of $1.3 million pertaining to the Corporation's investment in preferred stock of Citizens Bank of Jamaica. Moreover, the daily rental operations contributed to the increase in other operating income. Partially offsetting these increases was the recording of a loss of $3.3 million in the market value of a building which was subsequently sold in the last quarter of 1997. F-11 64 TABLE G Operating Expenses
Year ended December 31, - ------------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) Five-Year 1997 1996 1995 1994 1993 C.G.R. ----------------------------------------------------------------------------------- Salaries................................. $211,741 $185,946 $172,504 $160,996 $151,432 9.47% Pension and other benefits............... 69,468 64,609 57,568 45,546 44,713 13.75 Profit sharing........................... 25,684 22,692 19,003 19,205 19,766 8.55 ---------------------------------------------------------------------------------- Total personnel costs.................. 306,893 273,247 249,075 225,747 215,911 10.27 ---------------------------------------------------------------------------------- Equipment expenses....................... 66,446 57,186 47,854 42,229 32,010 20.07 Professional fees........................ 46,767 36,953 28,677 27,002 23,256 18.83 Net occupancy expense.................... 39,617 36,899 32,850 28,440 26,085 9.26 Business promotion ...................... 33,569 26,229 17,801 16,271 16,638 21.75 Communications........................... 33,325 26,470 23,106 20,308 18,203 14.35 Other taxes.............................. 30,283 23,214 20,872 19,807 15,996 15.70 Amortization of intangibles.............. 22,874 18,054 20,204 18,003 16,176 8.97 Printing and supplies.................... 15,539 11,964 11,069 8,817 8,189 16.34 Other operating expenses: Transportation and travel.............. 7,186 5,852 4,424 3,946 3,554 18.04 FDIC assessment........................ 1,499 1,544 10,257 19,346 17,802 (38.01) All other.............................. 32,922 24,307 20,644 17,930 18,456 9.40 --------------------------------------------------------------------------------- Subtotal .......................... 330,027 268,672 237,758 222,099 196,365 13.05 --------------------------------------------------------------------------------- Total ............................. $636,920 $541,919 $486,833 $447,846 $412,276 11.66% ================================================================================== Efficiency ratio......................... 62.12% 61.33% 64.88% 66.21% 66.94% Personnel costs to average assets........ 1.67 1.68 1.76 1.85 2.02 Operating expenses to average assets..... 3.46 3.32 3.45 3.66 3.86 Assets per employee (in millions)........ $ 2.18 $ 2.10 $ 2.01 $ 1.68 $ 1.53
SECURITIES AND TRADING GAINS During 1997, the Corporation sold $5.2 billion in investment securities available-for-sale as part of its asset/liability strategy, realizing a net gain of $2.3 million. In 1996, $2.9 billion of the investment securities available-for-sale were sold for a net gain of $3.1 million, reflecting gains of $7.0 million on the sale of equity securities partially offset by a loss of $3.9 million on the sale of other securities. Trading account activities for the year ended December 31, 1997, resulted in profits of $3.9 million compared with profits of $108 thousand in 1996. In 1997, the Corporation benefitted from favorable market conditions, particularly related to mortgage-backed securities at Popular Home Mortgage. OPERATING EXPENSES Operating expenses for 1997 increased $95.0 million or 17.5%, reaching $636.9 million compared with $541.9 million in 1996 and $486.8 million in 1995. As a percentage of average assets, operating expenses increased to 3.46% in 1997 from 3.32% in 1996 and 3.45% in 1995. The operations acquired in the mainland during the year accounted for approximately $23.0 million of the increase. Also, the acquisition of RCB on June 30, 1997, which was merged into BPPR, accounted for approximately $16 million in additional expenses during 1997. Table G presents a detail of operating expenses and various related ratios for the last five years. The Corporation's largest category of operating expenses, personnel costs, totaled $306.9 million in 1997, an increase of 12.3% compared with $273.2 million in 1996. The growth in personnel costs was led by an increase of $25.8 million in salary expense, resulting from an increase in headcount, primarily caused by the Corporation's business expansion and acquisitions, and annual merit increases. Full-time equivalent employees (FTE) amounted to 8,854 at December 31, 1997, from 7,996 at the end of 1996. The acquisitions completed in the U.S. added 363.5 FTE, while RCB added 375.5 FTE at the acquisition dates. The ratio of F-12 65 assets per employee rose to $2.18 million in 1997 from $2.10 million in 1996, while personnel costs as a percentage of average assets decreased slightly to 1.67% from 1.68% in 1996. Total personnel costs for 1995 amounted to $249.1 million. Employee benefits, including profit sharing expense, rose $7.9 million to $95.2 million in 1997, compared with $87.3 million in 1996. The rise in pension costs and other fringe benefits was primarily related to increases in medical plan costs and higher payroll tax expenses resulting from the increase in salaries. Furthermore, profit sharing expense rose $3.0 million, as a result of higher eligible salaries and stronger profitability ratios at BPPR. Other operating expenses, excluding personnel costs, totaled $330.0 million for the year ended December 31, 1997, compared with $268.7 million in 1996 and $237.8 million in 1995. Professional fees increased 26.6% from $37.0 million in 1996 to $46.8 million in 1997. The increase in this category reflected the Corporation's continued growth and expansion, and higher expenditures related with consulting and technical support. Business promotion grew $7.3 million or 28.0% due to the impact of the business expansion, the growth in business activity, and the development and promotion of new products and services. Also during 1997, the Corporation launched an institutional campaign in the continental U.S. to emphasize Banco Popular's presence and image as a Hispanic bank, and performed significant promotional efforts related to the new credit card program in U.S. Other taxes also reflected an increase of $7.1 million mainly due to higher levels of taxable property, higher municipal license taxes in Puerto Rico, and an increase in the tax rate for personal property in the municipality of San Juan, Puerto Rico, where the Corporation's headquarters are located. Equipment and communications expenses grew a combined $16.1 million or 19.3% in 1997. This increase mostly resulted from the expansion of the electronic payment system and network of POS terminals. By the end of 1997, the Corporation had increased its automated teller machine (ATM) network by 90 machines, when compared with prior year in order to expand the electronic delivery capabilities. Other operating expenses, which include transportation and travel expenses, insurance expenses, interchange and processing fees related with credit and debit cards, and FDIC assessment among others, increased $9.9 million mostly as a result of the Corporation's growth and expansion and the increased volume of credit and debit card transactions. Moreover, as a result of the acquisitions made after the third quarter of 1996, the amortization of intangibles rose $4.8 million during 1997, when compared with 1996. IMPACT OF THE YEAR 2000 ISSUE The Year 2000 Issue is the result of computer programs being written using two digits rather than four to define the applicable year. All computer programs that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations on normal business activities. Based on its assessment, the Corporation determined that it will be required to modify or replace significant portions of its software so that its computer systems will properly utilize dates beyond December 31, 1999. The Corporation's management believes that with some modifications to existing software and conversions to new software, the Year 2000 Issue will be mitigated. However, if such modifications and conversions are not made, or are not completed on a timely manner, the Year 2000 Issue could have a material impact on the operations of the Corporation. The Corporation has established a company-wide task force and developed an action plan addressing the Year 2000 Issue, that is currently being implemented. Under this action plan, the Corporation has initiated formal communications with all of its major suppliers and customers to determine the extent to which the Corporation is vulnerable to those third parties failure to remediate their own Year 2000 Issue. The Corporation's total Year 2000 project costs and estimates to complete are based on presently available information. The Corporation will utilize both internal and external resources to reprogram, or replace, and test the software for Year 2000 modifications. The total remaining incremental costs of the Year 2000 project is estimated at $11.9 million and will be funded through operating cash flows. The costs of the project are based on management's best estimates, which were derived utilizing numerous assumptions of future events including the continued availability of certain resources. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those planned. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes and similar uncertainties. F-13 66 INCOME TAX EXPENSE Income tax expense for the year ended December 31,1997, was $74.5 million compared with $70.9 million in 1996 and $59.8 million in 1995. The increase in 1997 is primarily due to higher pre-tax earnings by $28.0 million partially offset by higher benefits of net tax exempt interest income and certain tax credits available to the Corporation in its Puerto Rico operations. The effective tax rate was 26.2% in 1997, 27.7% in 1996 and 29.0% in 1995. The decrease in the effective tax rate was principally due to an increase in the exempt interest income, principally from U.S. Treasury and agency securities as previously explained in the net interest income section. The difference between the effective tax rates and the maximum tax rate for the Corporation, which is 39%, is primarily due to the interest income earned on certain investments and loans which is exempt from income tax, net of the disallowance of related expenses attributable to the exempt income. The Corporation uses an asset and liability approach in accounting for income taxes, as required by SFAS 109. The objective of the SFAS 109 is to recognize the amount of taxes payable or refundable in the current year and to recognize deferred tax liabilities or assets for the future tax consequences of events that have been recognized in the financial statements or tax returns. The measurement of deferred tax liabilities or assets is based on regular tax rates and provisions of the tax laws. At December 31, 1997, the Corporation's net deferred tax assets amounted to $83 million, compared with $64 million at December 31, 1996. Gross deferred tax assets rose from $90 million to $118 million mainly as a result of the recognition of a deferred tax asset of $32 million related with the repeal of the reserve method of accounting for losses on loans. Other components of gross deferred tax assets are net operating losses, tax credits, postretirement benefit obligations and other temporary differences principally arising from the deferral of loan origination costs and commissions. When necessary, a valuation allowance is recorded for those deferred tax assets for which the Corporation cannot determine the likelihood of their realizability. At December 31, 1997, the valuation allowance amounted to $0.2 million compared with $0.6 million at December 31, 1996. Gross deferred tax liabilities were $35 million at December 31, 1997, compared with $26 million at December 31, 1996. The major components of deferred tax liabilities are differences between assigned values and tax bases of assets and liabilities recognized in purchase business combinations and other temporary differences primarily related with unrealized gains on investment securities available-for-sale. On October 31, 1994, the Governor of Puerto Rico signed into law the Puerto Rico Tax Reform Act of 1994. The Act made comprehensive important changes in several major areas of the law. In general, the provisions of the Act were effective for taxable years beginning after June 30, 1995. Accordingly, most changes of the Reform were effective for the Corporation in 1996. Among the most significant changes that affect the Corporation are: the reduction in the higher marginal rate from 42% to 39%, the repeal of the reserve method for determining losses on loans and the recapture into income for tax purposes of the allowance for loan losses balance at December 31, 1995 over a period of four years, the 100% dividend received deduction on dividends received from controlled domestic corporations and the repeal of the 29% withholding tax on interest paid to non-residents and unaffiliated parties. Please refer to Note 23 of the Consolidated Financial Statements for additional information on income taxes. STATEMENT OF CONDITION ANALYSIS At December 31, 1997, the Corporation's total assets reached $19.3 billion, reflecting an increase of $2.5 billion or 15.1% when compared with $16.8 billion at December 31, 1996. The growth in total assets was partially related to the acquisition of RCB on June 30, 1997, with $791 million in total assets at that date. Also, the operations acquired in Florida, Illinois and Texas during 1997 contributed to the growth of the Corporation with $602 million in total assets at acquisition date. Total assets at the end of 1995 amounted to $15.7 billion. Average total assets for 1997 amounted to $18.4 billion compared with $16.3 billion in 1996 and $14.1 billion in 1995. EARNING ASSETS Earning assets at December 31, 1997, totaled $18.1 billion, compared with $15.5 billion at December 31, 1996 and $14.7 billion at December 31, 1995. Money market investments, investment and trading securities amounted to $6.7 billion at December 31, 1997, representing an increase of $1.0 billion when compared with $5.7 billion at December 31, 1996. The increase was mainly reflected in investment F-14 67 TABLE H Loans Ending Balances
As of December 31, - ----------------------------------------------------------------------------------------------------------------------------------- (In thousands) Five-Year 1997 1996 1995 1994 1993 C.G.R. -------------------------------------------------------------------------------------------- Commercial, industrial and agricultural........................ $ 4,637,409 $3,822,096 $3,205,031 $2,893,534 $2,369,514 16.82% Construction.......................... 250,111 200,083 215,835 161,265 153,436 7.72 Lease financing....................... 581,927 516,001 498,750 448,236 375,693 12.92 Mortgage*............................. 2,833,896 2,576,887 2,403,631 2,177,763 1,576,044 29.08 Consumer.............................. 3,073,264 2,663,961 2,354,237 2,100,531 1,872,235 10.80 -------------------------------------------------------------------------------------------- Total .............................. $11,376,607 $9,779,028 $8,677,484 $7,781,329 $6,346,922 16.72% ============================================================================================
*Includes loans held-for-sale. securities, which totaled $5.6 billion at the end of 1997, compared with $4.6 billion in 1996. The rise in investment securities was mainly due to arbitrage opportunities undertaken by BPPR during 1997. Investment securities available-for-sale grew $1.8 billion, from $3.4 billion in 1996 to $5.2 billion in 1997. Partially offsetting this increase, was a reduction of $0.8 billion in the investment securities held-to-maturity. Money market investments reached $814 million at December 31, 1997, compared with $800 million at the same date in 1996. Trading account securities totaled $222 million at December 31, 1997, compared with $292 million at December 31, 1996. As shown in Table H, total loans at December 31, 1997, amounted to $11.4 billion, an increase of $1.6 billion or 16.3% over the $9.8 billion reported at the end of 1996. At the same date in 1995 total loans were $8.7 billion. The commercial loan portfolio had the largest growth, rising $815 million or 51.0% of the total increase in loans, followed by consumer loans which increased $409 million or 25.6% and mortgage loans with $257 million or 16.1% of the total increase. The lease financing portfolio increased $66 million while the construction loan portfolio increased $50 million. Commercial loans reached $4.6 billion at December 31, 1997, compared with $3.8 billion at the same date last year. The increase in the commercial loan portfolio was principally attained at BPPR and Banco Popular, Illinois, which increased $658 million and $179 million, respectively. The growth experienced at BPPR was mostly the result of the continued marketing efforts geared at the retail and middle market, primarily through the origination of "Flexicuenta de Negocios", an innovative product for commercial customers with integrated deposit, investment and credit facilities. Also, the growth was achieved through increases in government guaranteed loans, primarily SBA loans, the development of a sales culture and the acquisitions of RCB in Puerto Rico, and the acquisitions performed in Illinois, Florida and Texas. At their acquisition dates, these banking operations contributed $187 million to the commercial loan portfolio. Commercial loans at December 31, 1995 totaled $3.2 billion. The Corporation's management expects that the growth in the commercial loan portfolio will continue during 1998 primarily in the service industries, small and middle market, and construction and land developers, based on the introduction of government promoted privately developed housing projects and infrastructure development projects in Puerto Rico. During 1997, consumer loans grew to $3.1 billion compared with $2.7 billion at the end of 1996. Consumer loans, which include personal, auto and boat, credit cards and reserve lines grew $409 million principally at BPPR, Equity One, Banco Popular, Illinois and Popular Finance by $265 million, $46 million, $39 million and $37 million, respectively. At BPPR, RCB contributed $137 million as of the acquisition date, while the operations acquired in the mainland contributed $50 million in consumer loans. At December 31, 1995, consumer loans totaled $2.4 billion. Of the total portfolio of consumer loans, 46.2% are secured loans of which 22.3% are secured by mortgages and 3.4% have cash collateral. The personal loan portfolio amounted to $1.8 billion at December 31, 1997, compared with $1.5 billion reported at December 31, 1996, or 57.9% of the total consumer loan portfolio as of both dates, an increase of $237 million or 15.4%. Most of the growth was attained at BPPR, where personal loans rose $154 million to $1.4 billion at December 31, 1997. Auto loans, which represented 19.5% of the consumer loan portfolio as of December 31, 1997, rose $72 million to $601 million in 1997. The increase in this category was mostly achieved through business expansion and marketing efforts. The credit card portfolio rose $78 million to $552 million at December 31, 1997, principally at BPPR, whose portfolio increased $73 million F-15 68 or 93% of the total increase, due to strong marketing efforts in new products. Also, the acquisition of RCB contributed $19 million to this increase. The Corporation had $2.8 billion in mortgage loans as of December 31, 1997, compared with $2.6 billion at the same date in 1996 and $2.4 billion in 1995. This increase was achieved in spite of the sale of $655 million of mortgage loans during 1997, mostly through the expansion in the United States and a higher loan origination volume in Puerto Rico. The lease financing portfolio amounted to $582 million as of December 31, 1997, compared with $516 million and $499 million as of December 31, 1996 and 1995, respectively. Construction loans amounted to $250 million as of December 31, 1997, from $200 million a year earlier and $216 million as of the same date in 1995. DEPOSITS AND OTHER INTEREST-BEARING LIABILITIES Total deposits at December 31, 1997, increased $986 million or 9.2% reaching $11.7 billion compared with $10.8 billion at December 31, 1996. The increase was related to the acquisitions performed during 1997, contributing $1.1 billion in total deposits at their respective acquisition dates. The increase was achieved notwithstanding the decrease of $367 million in 936 deposits. The geographic distribution of the Corporation's total deposits at the end of 1997, included 76.9% in Puerto Rico and the Virgin Islands, and the remaining 23.1% in the U.S. mainland. Total deposits as of December 31, 1995, amounted to $9.9 billion. Core deposits totaled $9.7 billion by the end of 1997, compared with $8.6 billion at the same date last year. The growth resulted principally from rises of $363 million in certificates of deposit under $100,000, $384 million in savings accounts, $216 million in demand deposits, and $184 million in NOW and money market accounts. At their respective acquisition dates, the acquired operations contributed approximately $918 million to the increase in core deposits. Borrowings, excluding subordinated notes increased $1.1 billion, from $4.3 billion at the end of 1996 to $5.4 billion at December 31, 1997. The rise was mainly due to increases in federal funds purchased and securities sold under agreements to repurchase of $848 million and $417 million in notes payable. The increase in borrowed funds was used primarily to finance the Corporation's loan growth and arbitrage activities. On May 23, 1997, a shelf registration was filed with the Securities and Exchange Commission, allowing the Corporation to issue medium-term notes, unsecured debt securities and preferred stock in an aggregate amount of up to $1 billion. These securities are guaranteed by the Corporation. As of December 31, 1997, the Corporation had issued $230 million in medium-term notes under that shelf registration. Guaranteed Preferred Beneficial Interest in Subordinated Debentures ("Capital Securities") were issued during the first quarter of 1997. The Corporation issued $150 million of those securities at 8.327% through BanPonce Trust I, a statutory business trust owned by Popular North America (formerly BanPonce Financial Corp.). The proceeds were upstreamed to Popular North America as junior subordinated debt under the same terms and conditions. The Captial Securities qualify as Tier I capital for regulatory purposes. STOCKHOLDERS' EQUITY At December 31, 1997, stockholders' equity amounted to $1.50 billion, an increase of $241 million or 19.0% compared with the balance of $1.26 billion at the end of 1996. This increase was mainly due to earnings retention, the issuance of 2,462,272 common shares for the acquisitions of RCB and National Bancorp, and the shares issued through the Corporation's Dividend Reinvestment and Purchase Plan. The shares issued for acquisitions resulted in $96 million of additional capital. As approved in the Corporation's stockholders meeting on April 25, 1997, the authorized common stock of the Corporation was increased from 90,000,000 shares to 180,000,000 shares. On May 8, 1997, the Board of Directors approved a stock repurchase program of up to 3 million shares of the outstanding common stock of the Corporation. As of December 31, 1997, the Corporation had purchased 988,800 shares under this program with a total cost of $39.6 million. The unrealized holding gains on securities available-for-sale, net of deferred taxes, amounted to $33.3 million at December 31, 1997, compared with $1.7 million a year ago. The Corporation had 4,000,000 shares of preferred stock outstanding at December 31, 1997. These shares are non-convertible and are redeemable at the option of the Corporation on or after June 30, 1998. Dividends are non-cumulative and are payable monthly at an annual rate per share of 8.35% based on the liquidation preference value of $25 per share. Regulatory guidelines require a minimum Tier I capital of 4%, total capital to risk-weighted assets ratio of 8% and a leverage ratio of 3%. Banks and bank holding companies which meet or exceed a Tier I ratio of 6%, a total capital ratio of 10% and a F-16 69 TABLE I Capital Adequacy Data
As of December 31, - -------------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) 1997 1996 1995 1994 1993 ---------------------------------------------------------------------------------- Risk-based capital: Tier I capital .......................... $ 1,335,391 $ 1,121,128 $ 1,003,072 $ 953,266 $ 786,686 Supplementary (Tier II) capital ......... 263,115 246,350 231,091 104,338 106,193 ---------------------------------------------------------------------------------- Total capital ....................... $ 1,598,506 $ 1,367,478 $ 1,234,163 $ 1,057,604 $ 892,879 ================================================================================== Risk-weighted assets: Balance sheet items ..................... $ 10,687,847 $ 9,368,420 $ 8,175,420 $ 7,219,906 $ 6,150,749 Off-balance sheet items ................. 287,822 275,397 249,529 199,327 250,102 ---------------------------------------------------------------------------------- Total risk-weighted assets .......... $ 10,975,669 $ 9,643,817 $ 8,424,949 $ 7,419,233 $ 6,400,851 ================================================================================== Ratios: Tier I capital (minimum required-4.00%) . 12.17% 11.63% 11.91% 12.85% 12.29% Total capital (minimum required-8.00%) .. 14.56 14.18 14.65 14.25 13.95 Leverage ratio (minimum required-3.00%) . 6.86 6.71 6.66 7.62 6.95 Equity to assets ........................ 7.44 7.33 7.58 7.57 7.42 Tangible equity to assets ............... 6.52 6.55 6.60 6.55 6.29 Equity to loans ......................... 13.00 12.97 13.03 13.01 13.91 Internal capital generation rate ........ 10.76 10.99 9.36 9.48 10.08 - --------------------------------------------------------------------------------------------------------------------------------
leverage ratio of 5% are considered well-capitalized by regulatory standards. At December 31, 1997, the Corporation exceeds those regulatory risk-based capital requirements for well-capitalized institutions by wide margins, due to the high level of capital and the conservative nature of the Corporation's assets. Tier I capital to risk-adjusted assets and total capital ratios at December 31, 1997, were 12.17% and 14.56%, respectively, compared with 11.63% and 14.18% at the same date in 1996. The Corporation's leverage ratio was 6.86% at December 31, 1997, compared with 6.71% as of the same date the previous year. Table I shows capital adequacy information for the current and previous four years. Intangible assets rose $101 million from $131 million at December 31, 1996. The rise in intangible assets was the result of the acquisitions during 1997, of which RCB accounted for $64 million at acquisition date, while the operations acquired in the U.S. resulted in $40 million in intangible assets. At December 31, 1997, total intangibles consisted of $120 million in goodwill, $75 million in core deposit intangibles, $29 million in mortgage servicing rights and $8 million in other intangibles. At the end of 1996, core deposit intangibles were $55 million, goodwill totaled $46 million, mortgage servicing rights were $26 million and other intangibles were $4 million. The average tangible equity increased to $1.19 billion for the year ended December 31, 1997, from $1.06 billion a year before, an increase of $128 million or 12.1%. Total tangible equity at December 31, 1997, was $1.27 billion compared with $1.13 billion at December 31, 1996. The tangible equity to assets ratio for 1997 was 6.52% compared with 6.55% in 1996. Book value per common share amounted to $20.73 at December 31, 1997, compared with $17.59 at year-end 1996. The market value of the Corporation's common stock at the end of 1997, was $49.50 compared with $33.75 a year earlier. The total market capitalization was $3.4 billion, compared with $2.2 billion as of December 31, 1996. The Corporation's stock is traded on the National Association of Securities Dealers Automated Quotation (NASDAQ) National Market System under the symbol BPOP. Table J shows the range of market quotations and cash dividends declared for each quarter during the last five years. The preferred stock of the Corporation is also traded on the NASDAQ National Market System under the symbol BPOPP. Its market value at December 31, 1997 and 1996 was $26.00 and $26.25 per share, respectively. The Corporation has a Dividend Reinvestment Plan for its stockholders. This plan offers the stockholders the opportunity to automatically reinvest their dividends in shares of common stock at a 5% discount from the average market price at the time of issuance. During 1997, 120,726 shares, equivalent to $4.6 million in additional capital, were issued under the plan. A total of 1,663,189 shares have been issued under this plan since its inception in 1989, contributing $24.5 million in additional capital. Dividends declared on common stock during 1997 totaled $54 million, compared with $46 million in 1996. The Corporation increased its quarterly dividend from $0.18 to $0.22 per common share, a 22.2% increase, effective with the dividend paid on F-17 70 TABLE J Common Stock Performance
Cash Book Market Price Dividends Value Dividend Price/ Market/ --------------- Declared Per Payout Dividend Earnings Book High Low Per Share Share Ratio Yield * Ratio Ratio 1997 $20.73 25.19% 1.76% 16.50x 238.78% 1ST QUARTER .... $36 3/4 $33 1/16 $ 0.18 2ND QUARTER .... 42 7/8 33 3/4 0.18 3RD QUARTER .... 55 7/8 41 1/8 0.22 4TH QUARTER .... 54 3/8 45 3/4 0.22 1996 17.59 24.63 2.65 12.59 191.87 1st quarter .... $23 1/8 $19 3/8 $ 0.15 2nd quarter .... 23 6/7 21 7/8 0.18 3rd quarter .... 27 3/4 22 5/8 0.18 4th quarter .... 35 25 7/8 0.18 1995 15.81 26.21 3.15 9.24 122.55 1st quarter .... $15 7/8 $14 1/16 $0.13 2nd quarter .... 17 3/4 15 5/8 0.15 3rd quarter .... 19 1/2 17 3/4 0.15 4th quarter .... 19 15/16 19 1/16 0.15 1994 13.74 27.20 3.18 7.66 102.37 1st quarter .... $16 1/4 $15 3/8 $0.12 2nd quarter .... 16 3/8 15 1/2 0.12 3rd quarter .... 16 5/8 15 3/4 0.13 4th quarter .... 16 1/2 13 1/2 0.13 1993 12.75 25.39 2.97 9.42 123.58 1st quarter .... $15 5/8 $13 1/4 $0.10 2nd quarter .... 14 1/8 12 3/16 0.10 3rd quarter .... 15 1/8 13 1/4 0.12 4th quarter .... 16 1/8 14 7/8 0.13
*Based on the average high and low market price for the four quarters. Note: All per share data has been adjusted to reflect the stock split effected in the form of a dividend of one share for each share outstanding on July 1, 1996. October 1, 1997. Total dividends declared per common share for 1997 were $0.80 compared with $0.69 in 1996 and $0.58 in 1995. The dividend payout ratio to common stockholders for the year was 25.19% compared with 24.63% in 1996. Dividends declared on the preferred stock amounted to $8.35 million in 1997 and 1996. Popular International Bank, Inc. and Popular North America, Inc.'s bank subsidiaries (Banco Popular, Illinois, Banco Popular, N.A. (California), Banco Popular, N.A. (Florida), Banco Popular, N.A. (Texas) and Banco Popular, FSB) have certain statutory provisions and regulatory requirements and policies, such as the maintenance of adequate capital, that limit the amount of dividends they can pay. Other than these limitations, no other restrictions exist on the ability of Popular International Bank, Inc. and Popular North America, Inc. to make dividend and asset distributions to the Corporation, nor on the ability of the subsidiaries of Popular North America, Inc., except for Banco Popular, FSB, to make distributions to Popular North America, Inc. In connection with the acquisition by Banco Popular, FSB from the Resolution Trust Company (RTC) of four New Jersey branches of the former Carteret Federal Savings Bank, the RTC provided to Banco Popular, FSB interim financial assistance in the form of a loan in the amount of $20 million, which matures on January 20, 2000, but which is prepayable anytime before then. Pursuant to the terms of such financing, Banco Popular, FSB may not, among other things, declare or pay any dividends on its outstanding capital stock (unless such dividends are used exclusively for payment of principal of or interest on such RTC loan) or make any distribution of its assets until payment in full of such promissory note. As of December 31, 1997, the undistributed earnings of Banco Popular, FSB totaled $49 million. RISK MANAGEMENT Popular, Inc. has specific policies and procedures which structure and delineate the management of risks, particularly those related with interest rate exposure, liquidity and credit, all of which are broadly defined below. F-18 71 MARKET RISK Market risk is the risk of economic loss arising from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates, commodity prices, and other relevant market or price changes. The Corporation's primary market risk exposure is that to interest rates as the net interest income is affected primarily by interest rate volatility and its impact on the repricing of assets and liabilities. Interest rate risk refers to the probability of a reduction in earnings due to fluctuations in interest rates. Other factors which can influence the Corporation's net interest income are the spread between different market rates or basis risk, timing differences between the maturity and repricing of assets and liabilities and the sensitivity of their rates to market interest rates. It is a priority for the Corporation's management to monitor continuously the degree of interest rate risk assumed and ensure that it remains within an acceptable range. During fiscal 1997, net interest income accounted for 76% of the Corporation's gross revenues. A major responsibility of the Corporation's Board of Directors and management is to ensure that interest rate volatility does not affect adversely net interest income, and hence, profitability. The Board of Directors is responsible for ensuring that interest rate risk is managed prudently and it delegates this responsibility on the Asset/Liability Management Committee (ALCO). The Board approves interest rate risk policies and oversees its implementation by the ALCO. The objective of the ALCO is to ensure that the Corporation's net interest income remains stable despite the potential volatility of interest rates. TRADING SECURITIES Another source of market risk for the Corporation is the risk associated with its trading activities. Financial instruments, including, to a limited extent, derivatives such as interest rate futures and options contracts, are utilized by the Corporation in connection with its trading activities and are carried at market value. In conjunction with mortgage banking activities, the Corporation records the securitization of mortgage loans held-for-sale as a sale of mortgage loans and the purchase of a mortgage-backed security classified as a trading security. Realized and unrealized changes in market values are recorded separately in the trading profit or loss account in the period in which the changes occur. Interest revenue and expense arising from trading instruments are included in the income statement as part of net interest income rather than in the trading profit or loss account. Securities sold but not yet purchased, which represent the Corporation's obligation to deliver securities sold which were not owned at the time of sale ("short sales"), are recorded at market value. At December 31, 1997, the Corporation trading portfolio represented 1.2% of total assets or $222 million as compared with 1.7% or $292 million at December 31, 1996, and was composed of the following:
Weighted Amount Average Yield ------------------------------ (In thousands) Mortgage-backed securities ..... $150,094 6.14% Commercial paper ............... 26,588 5.70 US Treasury and agencies ....... 32,858 5.43 Puerto Rico Government obligations 10,613 5.20 Other .......................... 2,150 6.78 ------------------------------ $222,303 5.94% ==============================
The Corporation's trading portfolio as of December 31, 1997, was comprised primarily of securities issued by Puerto Rico entities or collateralized by real estate assets located in Puerto Rico. These usually have certain tax benefits, if purchased by residents of Puerto Rico. The prices of these securities tend to be less sensitive to changes in interest rates than similar securities issued by U.S. mainland entities, because of tax treatment for Puerto Rico investors. Recent changes to local tax laws in Puerto Rico have decreased the supply of some types of tax-advantaged investments, thereby reducing the sensitivity of a portion of the Corporation's securities portfolio to changes in interest rates. F-19 72 TABLE K Interest Rate Sensitivity
As of December 31, 1997 - ------------------------------------------------------------------------------------------------------------------------- By Repricing Dates ------------------------------------------------------------------------------- After After Within three months six months 0-30 31-90 but within but within After one (Dollars in thousands) days days six months one year year - ------------------------------------------------------------------------------------------------------------------------- Assets: Federal funds sold and securities purchased under agreements to resell ................ $ 485,184 $ 310,595 $ 7,024 Short-term interest bearing deposits in other banks ............. 11,187 100 Investment and trading securities ..... 1,088,640 172,295 433,769 $ 245,689 $ 3,929,908 Loans ................................. 3,400,811 556,864 503,157 1,008,750 5,907,025 Other assets .......................... ---------------------------------------------------------------------------- Total ............................. 4,985,822 1,039,854 943,950 1,254,439 9,836,933 ---------------------------------------------------------------------------- Liabilities and stockholders' equity: Savings, NOW and money market accounts ............................ 703,405 66,828 4,172,249 Other time deposits ................... 1,161,381 846,091 803,395 501,099 948,302 Federal funds purchased and securities sold under agreements to repurchase . 2,172,914 271,915 87,500 10,000 181,000 Other short-term borrowings ........... 486,968 330,922 195,536 233,866 40,143 Notes payable ......................... 234,439 280,318 23,000 40,500 825,439 Subordinated notes and capital securities ......................... 275,000 Non-interest bearing deposits ......... Other non-interest bearing liabilities Stockholders' equity .................. ---------------------------------------------------------------------------- Total ............................. 4,759,107 1,796,074 1,109,431 785,465 6,442,133 ---------------------------------------------------------------------------- Off-balance sheet financial instruments 40,000 160,000 (25,000) (175,000) Interest rate sensitive gap ........... 266,715 (596,220) (165,481) 443,974 3,219,800 Cumulative interest rate sensitive gap ....................... 266,715 (329,505) (494,986) (51,012) 3,168,788 Cumulative sensitive gap to earning assets ...................... 1.48% (1.82%) (2.74%) (0.28%) 17.54% - ------------------------------------------------------------------------------------------------------------------------- Non-interest bearing (Dollars in thousands) funds Total - ---------------------------------------------------------------------- Assets: Federal funds sold and securities purchased under agreements to resell ................ $ 802,803 Short-term interest bearing deposits in other banks ............. 11,287 Investment and trading securities ..... 5,870,301 Loans ................................. 11,376,607 Other assets .......................... $1,239,509 1,239,509 ------------------------- Total ............................. 1,239,509 19,300,507 ------------------------- Liabilities and stockholders' equity: Savings, NOW and money market accounts ............................ 4,942,482 Other time deposits ................... 4,260,268 Federal funds purchased and securities sold under agreements to repurchase . 2,723,329 Other short-term borrowings ........... 1,287,435 Notes payable ......................... 1,403,696 Subordinated notes and capital securities ......................... 275,000 Non-interest bearing deposits ......... 2,546,836 2,546,836 Other non-interest bearing liabilities 358,369 358,369 Stockholders' equity .................. 1,503,092 1,503,092 -------------------------- Total ............................. 4,408,297 19,300,507 -------------------------- Off-balance sheet financial instruments Interest rate sensitive gap ........... Cumulative interest rate sensitive gap ....................... Cumulative sensitive gap to earning assets ...................... - ---------------------------------------------------------------------
INTEREST RATE RISK Various techniques are employed to assess the degree of interest rate risk in the Corporation. These include static gap analysis, simulations and duration analysis. Each focuses on different aspects of the interest rate risk that is assumed at any point in time, and are therefore used jointly to make informed judgements about the risk levels and the appropriateness of strategies under consideration. Gap analysis measures the volume of assets and liabilities at a point in time and their repricing during future time periods. The volume of assets repricing is adjusted to take into consideration the expected prepayment of certain assets such as mortgage loans and mortgage-backed securities, which can be prepaid before their contractual maturity. Deposits repricing in future periods are adjusted to take into consideration the sensitivity of non-time deposits to market rates. Since these typically reprice with a lag to movements in short-term market rates and by a lower magnitude, deposits repricing within one year include an amount of non-time deposits consistent with the historical relationship of their rates against market interest rates as measured using statistical techniques. The net balance of assets or liabilities repricing during future time periods particularly within one year is an indicator of the degree of short-term interest rate risk being assumed by the Corporation. It is subject to policy limits approved by the Board. Table K presents the Corporation's interest rate sensitivity as of December 31, 1997. F-20 73 In addition to the Corporation's static gap position, other factors which affect the future level of net interest income include, the relationship between different market rates as well as their levels, the interest rates of assets and liabilities due for repricing, and the volume and duration of new assets and liabilities booked in future periods. Simulation analysis, as further explained below, measures the impact of these factors on future net interest income, and serves as another measure of the short-term interest rate risk assumed by the Corporation. Various interest rate scenarios are utilized in simulation analysis to assess the stability of net interest income in both rising and declining rate scenarios. Whereas static gap and simulation analysis are useful for measuring the degree of short-term market risk assumed, duration analysis focuses on the level of longer-term market risk assumed. Duration measures the sensitivity of the market prices of assets and liabilities to changes in interest rates. It focuses on economic value, as opposed to gap and simulation analysis which consider primarily the impact on net interest income. Since duration considers the impact of rate changes on all the cash flows of assets and liabilities, it is considered a more comprehensive measure of risk than gap or simulation analysis. Duration addresses another weakness of other risk measurement methods by stating all future cash flows of assets and liabilities in terms of their present value. Sensitivity analysis (from here on sensitivity), is performed at the corporate level to, among other financial analysis described above, express the potential loss in future earnings resulting from selected hypothetical changes in interest rates. Sensitivity includes both trading instruments and other than trading instruments. Derivative financial instruments, specifically interest rate swaps, are also included in the sensitivity to achieve more comprehensive risk management. Sensitivity is calculated on a monthly basis using a simulation model which incorporates both actual balance sheet figures detailed by maturity and interest yields or costs, the expected balance sheet dynamics, reinvestments, and other non-interest related data. Simulations are run using various interest rate scenarios to determine potential changes to the future earnings of the Corporation. These forward looking figures of the Corporation reflect no significant changes between a most likely to occur interest rate scenario as compared with both rising and declining interest rate scenarios. The increase in net interest income on a hypothetical rising rate scenario for the next twelve months is $7.7 million and the decrease for the same period utilizing a hypothetical declining rate scenario is $5.7 million. Computations of the prospective effects of hypothetical interest rate changes are based on many assumptions, including relative levels of market interest rates, loan prepayments and deposits decay. They should not be relied upon as indicative of actual results. Further, the computations do not contemplate actions the management could take to respond to changes in interest rates. By their nature, these forward looking choices are only estimates and may be different from what actually occurs in the future. Rising and declining interest rate scenarios are estimated monthly, and are important inputs into the simulation model. These are calculated to represent the highest increase and decrease which various market rates should reflect during the following twelve months, with a 95% confidence level. This means that on average, in nineteen months out of every twenty, actual rate movements will not exceed the rising or declining rate scenario. The underlying assumption is that the movement of interest rates approaches a normal distribution and that its properties can be used to project maximum future changes in rates with a certain confidence level. The Corporation "backtests" rising and declining rate scenarios continuously to validate the confidence levels. As of December 1997, the simulation's rising and declining rate scenarios provided for a change of 75 basis points in the federal funds and prime rates within a 12-month period. Changes for the U.S. Treasury yield curve under rising and declining scenarios, were estimated at an average of aproximately 140 basis points. All changes for market rates estimated in the rising and declining rate scenarios exceeded 10% of their actual level as of the end of 1997, within a one-year timeframe. The maximum changes assumed for the prime rate (which is an administered rate) were 75 basis points, or 8.8% of the 8.50% level at which it ended 1997. During 1997, the general level of interest rates increased during the first four months while it decreased during the remainder of the year. During the first quarter, the financial markets were expecting a more restrictive monetary policy from the Federal Open Market Committee (FOMC) due to exceptionally strong economic growth and increasing levels of resource utilization rates. In March, the FOMC increased the federal funds rate 25 basis points, leaving it unchanged for the remainder of the year. In early 1997, the Corporation positioned its balance sheet to benefit from an increase in the general level of interest rates, but as the year progressed and interest rates started to decline, it extended the duration of the investment portfolio to address more F-21 74 effectively the risk posed by declining interest rates. The Corporation's net interest margin for the year, on a taxable equivalent basis, was 4.84% which represents an increase of seven basis points over that of the previous year. As of December 31, 1997, the Corporation had a total of $1.3 billion in mortgage-backed securities including collateralized mortgage obligations (CMO). CMOs amounted to $864 million or 66% of the mortgage-backed securities portfolio at that date. The portfolio had an estimated average life of 9.2 years and an estimated average yield to maturity of 6.41%. The average life and yield to maturity of the mortgage-backed securities portfolio is partially affected by the level of prepayments of the underlying mortgage loans. The portfolio includes securities which represent an interest in pools of mortgage loans as well as obligations (CMOs) collateralized by such securities. In most cases, the debtor of the underlying loans has the option of repaying the principal balance owed at any time. A decrease in the general level of interest rates usually results in a higher level of prepayments of mortgage loans, while an increase would tend to reduce the level of prepayments. The yield to maturity of mortgage-backed securities may also be affected by a change in prepayment rates. Mortgage-backed security portfolios with an aggregate unamortized premium may have a decrease in their yield to maturity in an environment of increasing prepayment speeds, whereas the yield to maturity may increase in an environment of decreasing prepayment speeds. The opposite is true in the case of portfolios with aggregate discounts. The mortgage-backed securities portfolio of the Corporation had an aggregate premium of $3.9 million, as of December 31, 1997. Derivatives are used, to a limited extent, by the Corporation with the primary objective of controlling exposures to market risk. The primary instruments used include exchange-traded futures contracts and interest rate swaps. Financial futures are used primarily for hedging the cost of future debt issuances as well as protecting the value of assets from market risk. Interest rate swaps are used primarily to synthetically increase the duration of borrowings. The notional amount of outstanding interest rate swaps as of December 31, 1997 was $230 million, which represents an increase of $90 million compared to the end of the previous year. The following table indicates the types of derivative financial instruments the Corporation held at December 31, 1997.
----------------------------------------- Weighted Notional average Fair amount rate (%) value ----------------------------------------- (Dollars in thousands) Interest rate swaps: Pay floating/receive fixed ..... $ 15,000 5.94 / 6.42 $ 108 Pay fixed/receive floating ...... 215,000 6.24 / 5.88 (1,678) Interest rate swaptions ......... 32,271 5.86 23,277 Interest rate options............ 60,917 533 Interest rate caps............... 3,413 41 Interest rate floors............. 3,413 (46) Foreign exchange contracts ...... 1,234
LIQUIDITY RISK The objective of the Corporation's liquidity management is to ensure the ability to raise financing for its current operations and future growth. Liquidity is a function of the ability to raise funds through borrowings in the financial markets, as well as obtain funding through the use of the Corporation's assets. Other objectives pursued in the Corporation's liquidity management are the diversification of funding sources and the control of interest rate risk. Management tries to diversify the sources of financing used by the Corporation in order to avoid undue reliance on any particular source. Since the duration and repricing characteristics of the Corporation's borrowings determine to a major extent the overall interest rate risk of the Corporation, they are also actively managed. The Corporation's assets and liabilities represent substantial sources of liquidity. Among the Corporation's assets, the investment securities and loan portfolios can be used to raise financing, while among the liabilities, various mechanisms are used to borrow funds. These include gathering retail and corporate deposits in the markets in which the Corporation competes, repurchase agreements, unsecured short-term borrowings in the U.S. money markets, commercial paper, medium term notes, bank notes and others. Notes 9 through 16 to the financial statements present details of the Corporations's deposits and borrowings by type, as of December 31, 1997 and 1996. F-22 75 TABLE L Maturity Distribution of Earning Assets
As of December 31, 1997 - ----------------------------------------------------------------------------------------------------------------------------------- Maturities ------------------------------------------------------------------------------------------ After one year through five years After five years -------------------------------------------------------- Fixed Variable Fixed Variable One year interest interest interest interest (In thousands) or less rates rates rates rates Total - ----------------------------------------------------------------------------------------------------------------------------------- Money market securities................ $ 760,160 $ 45,200 $ 22 $ 8,708 $ 814,090 Investment and trading securities........................... 1,266,772 $3,465,706 458,832 525,564 43,460 5,760,334 Loans: Commercial........................... 2,116,970 864,377 647,453 421,179 587,430 4,637,409 Construction......................... 184,937 39,845 4,755 13,245 7,329 250,111 Lease financing...................... 163,114 412,001 6,812 581,927 Consumer............................. 1,026,818 1,856,070 7,170 183,102 104 3,073,264 Mortgage......................... 628,176 748,463 20 1,457,183 54 2,833,896 ---------------------------------------------------------------------------------------- Total............................ $6,146,947 $7,386,462 $1,163,430 $2,607,107 $ 647,085 $17,951,031 ========================================================================================
Note: Federal Reserve Bank stock, Federal Home Loan Bank stock, and other equity securities held by the Corporation are not included in this table. - ------------------------------------------------------------------------------- The investment securities portfolio is a major source of liquidity within the Corporation's assets. It consists primarily of U.S. Treasury and Agency obligations. As of December 31, 1997, the entire portfolio totaled $5.6 billion with an average life of 3.9 years. The net unrealized gain of the portfolio at that time amounted to $45.3 million. U.S. Treasury and Agency securities amounted to $4.1 billion or 73% of the total portfolio, with an average life of 2.2 years. Securities classified available-for-sale totaled $5.2 billion or 93% of the total portfolio, and the net unrealized gain amounted to $44.5 million. As shown in Table L, $1.3 billion or 22% of the investment securities portfolio had a maturity of one year or less at the end of 1997. The Corporation's loan portfolio is another liquidity source since it generates substantial cash flow as a result of principal and interest payments and principal prepayments. In particular, mortgage loans and some types of consumer loans have active secondary markets and can be sold or pledged for borrowings. Also, some loans can be securitized or sold outright in the secondary markets. Table L presents a maturity distribution of the loan portfolio as of December 31, 1997. As of that date $4.1 billion or 36% of the loan portfolio matured within one year. Despite the increasing importance of wholesale borrowings at the Corporation, deposits are the single most important funding source. They tend to be less volatile than institutional borrowings and their cost is less sensitive to changes in market rates. Deposits include retail and commercial demand deposit accounts as well as time deposits and savings accounts. The Corporation has obtained substantial shares of the deposits in its principal markets, due to the extensive branch network and leadership in electronic banking. As of December 31, 1997, the Corporation's core deposits amounted to $9.7 billion or 83% of total deposits, an increase of $1.2 billion or 13.7% from the previous year. As presented in Table M, during fiscal 1997 average total deposits increased $530 million over the previous year, while average core deposits rose $579 million. The volume of the Corporation's core deposits located in continental U.S. markets increased to $2.6 billion as of December 31, 1997 from $1.9 billion as of the end of the previous year. Certificates of deposit with denominations of $100,000 and over as of December 31, 1997, totaled $2.0 billion, or 17.1% of total deposits. Their distribution by maturity was as follows:
(In thousands) 3 months or less........... $1,271,197 3 to 6 months.............. 307,860 6 to 12 months............. 147,748 over 12 months............. 286,475 ---------- $2,013,280 ==========
F-23 76 TABLE M Average Total Deposits
For the Year - ----------------------------------------------------------------------------------------------------------------------- Five-Year (In thousands) 1997 1996 1995 1994 1993 C.G.R. ------------------------------------------------------------------------------ Private demand........................ $ 1,972,052 $ 1,726,596 $1,571,405 $1,515,158 $1,396,339 9.28% Public demand......................... 317,248 321,249 268,317 273,565 235,323 9.53 Other non-interest bearing accounts... 4,367 5,910 5,983 6,967 3,678 2.78 ------------------------------------------------------------------------------ Non-interest bearing............ 2,293,667 2,053,755 1,845,705 1,795,690 1,635,340 9.30 ------------------------------------------------------------------------------ Savings accounts...................... 3,393,279 3,095,898 2,913,380 2,839,300 2,492,845 10.67 NOW and money market accounts......... 1,281,298 1,148,727 1,102,593 1,133,106 1,078,075 6.04 ------------------------------------------------------------------------------ Savings deposits................ 4,674,577 4,244,625 4,015,973 3,972,406 3,570,920 9.28 ------------------------------------------------------------------------------ Certificates of deposit: Under $100,000...................... 1,216,583 1,307,323 1,281,873 1,160,063 1,143,624 0.76 $100,000 and over................... 1,865,720 1,371,928 1,034,195 590,305 498,093 29.53 936 ................................ 508,789 1,020,064 999,384 1,007,147 1,029,450 (15.81) ------------------------------------------------------------------------------ Certificates of deposit......... 3,591,092 3,699,315 3,315,452 2,757,515 2,671,167 4.47 ------------------------------------------------------------------------------ Public time........................... 215,243 238,377 175,706 177,534 124,629 6.69 Other time............................ 216,978 225,724 229,315 134,081 122,829 10.78 ------------------------------------------------------------------------------ Other time deposits............. 432,221 464,101 405,021 311,615 247,458 8.63 ------------------------------------------------------------------------------ Interest bearing................ 8,697,890 8,408,041 7,736,446 7,041,536 6,489,545 7.11 ------------------------------------------------------------------------------ Total $10,991,557 $10,461,796 $9,582,151 $8,837,226 $8,124,885 7.54% ==============================================================================
Borrowings from institutional sources are an increasingly important source of financing for the Corporation. The Corporation's short-term borrowings include federal funds purchased, repurchase agreements and commercial paper. Federal funds purchased and repurchase agreements usually have maturities within 90 days, while commercial paper sold matures within 270 days. As of December 31, 1997, the outstanding balance of federal funds purchased, repurchase agreements and commercial paper sold amounted to $2.7 billion, an increase of $848 million as compared to the previous year. Long-term borrowings diversify the Corporation's funding sources and are a useful tool for adjusting the average duration of the Corporation's liabilities. These include primarily bank notes and medium term notes, which are sold to investors both directly and through a selling group of dealers. As of December 31, 1997, outstanding medium term notes and bank notes amounted to $1.4 billion, an increase of $417 million over the previous year. For information on the maturities of medium and long-term debt issued, please refer to notes 12 through 16 to the Consolidated Financial Statements. The Corporation's deposits and borrowings include funds from former 936 corporations. The outstanding balance of deposits and borrowings from former 936 corporations as of December 31, 1997, amounted to $1.8 billion, a decrease of $358 million as compared with the previous year. Total deposits and borrowings from former 936 corporations as of December 31, 1997, amounted to 9.9% of total liabilities, a decrease as compared with the previous year when these funds amounted to 13.7% of liabilities. Section 936 of the Internal Revenue Code was eliminated in 1996, in the legislation which increased the federal minimum wage. This legislation repealed the exemption from federal taxation of interest income earned from investments in financial assets issued in Puerto Rico, effective for fiscal years commencing after December 31, 1995. Since most investments by former 936 companies in financial assets issued in Puerto Rico are now subject to federal taxation, these have decreased in volume, particularly short-term investments. The exposure of the Corporation to short-term funds from former 936 corporations has decreased substantially since the repeal of Section 936. As of December 31, 1997, these funds maturing in less than one year amounted to $960 million which represents a decrease of 29% as compared with the previous year when the amount of these funds was $1.3 billion. F-24 77 CREDIT RISK MANAGEMENT AND LOAN QUALITY One of the Corporation's primary risk exposure is its credit risk, which represents the possibility of loss from a borrower's failure to perform according to the terms of a transaction. The Corporation controls and monitors this risk with policies, procedures and various levels of managerial involvement. The strategies utilized to manage credit risk begin with the adherence to policies and procedures established for the initial underwriting of the credit portfolio, followed by the ongoing monitoring of the portfolio, including the early identification of potential problems and their resolution. Also, the Corporation continues emphasizing the skills and experience of the credit staff and improving the processing technology. Furthermore, the Corporation has an independent Credit Review and Audit Division, which performs ongoing independent reviews of specific loans for credit quality, proper documentation and risk management purposes. This division is centralized and independent of the lending function. It also manages the credit rating system and tests the adequacy of the allowance for loan losses in accordance with generally accepted accounting principles (GAAP) and regulatory standards. Credit extensions are approved by credit officers of the respective lending departments. The number and level of officers approval depend on the dollar amount and risk characteristics of the credit facility. The Corporation receives collateral to support credit extensions and commitments, whenever it is considered necessary. The amount of collateral obtained is based on the credit assessment of the customer, and may include real or personal property, accounts receivable, inventory and cash on deposit. The Corporation's credit risk at December 31, 1997, was concentrated in its $11.4 billion loan portfolio, which represented 63% of earning assets. The loan portfolio is well-balanced as the Corporation's credit policies and procedures emphasize diversification among geographical areas, business and industry groups, to minimize the adverse impact of any single event or set of occurrences. The credit risk exposure is spread among individual consumers, small commercial loans and a diverse base of borrowers engaged in a wide variety of businesses. The Corporation has over 843,000 consumer loans and over 52,000 commercial lending relationships. Only 40 of these relationships have loans outstanding over $10 million. Highly leveraged transactions and credit facilities to finance speculative real estate ventures are minimal and there are no LDC loans. The following risk concentration categories existed at year-end. Geographic Risk - The asset composition of the Corporation by geographical area at December 31, 1997 and 1996 is presented in the following table:
1997 1996 (Dollars in thousands) ----------------------------------------------------------- Puerto Rico $14,189,332 73.5% $12,386,136 73.9% United States 4,616,196 23.9 3,756,526 22.4 U.S. and British Virgin Islands and Latin America 494,979 2.6 621,441 3.7 ----------------------------------------------------------- $19,300,507 100.0% $16,764,103 100.0% ===========================================================
At December 31, 1997, BPPR, the Corporation's largest subsidiary, operated 201 branches in Puerto Rico, 29 in New York, seven in the U.S. Virgin Islands and one in the British Virgin Islands. Puerto Rico's economic outlook is generally similar to that of the mainland, and the Government of the Island and its instrumentalities are all investment-grade rated borrowers in the United States capital markets. As previously discussed in the Liquidity Risk section of this financial review, in August 1996, the U.S. Congress approved legislation that repealed Section 936 of the Internal Revenue Code. The bill approved repealed the Qualified Possession Source Investment Income (QPSII) credit retroactively for taxable years beginning after December 31, 1995, while the income and wage credits are being phased-out in 10 years. No significant changes have been experienced on the general economic conditions of Puerto Rico as a result of the enactment of this law. Meanwhile, the Corporation continues diversifying its geographical risk. In 1997, the Corporation acquired Seminole National Bank, located in Florida. This banking operation operated three branches, with $19 million in loans and $23 million in deposits at acquisition date. Also in 1997, the Corporation acquired National Bancorp Inc. and CBC Bancorp, located in Illinois. These acquisitions added $261 million in loans and $408 million in deposits. In Puerto Rico, the Corporation completed the acquisition of RCB. This acquisition added $361 million in F-25 78 loans and $584 million in deposits. At the end of 1997, the Corporation expanded the operation to Texas with the acquisition of Houston BanCorporation, which added $39 million in loans and $41 million in deposits. Equity One, the Corporation's mortgage and consumer finance operation in the mainland, had 117 branches in 30 states and $1.2 billion in total assets at December 31, 1997, compared with 102 branches in 28 states and $1.1 billion in total assets at December 31, 1996. The following table presents the net income for 1997 and total assets as of December 31, 1997, by subsidiary:
% of % of Consolidated Consolidated (Dollars in thousands) Net Income Net Income Total Assets Assets - -------------------------------------------------------------------------------------------------------------------------- Banco Popular de Puerto Rico $178,725 85.28% $15,179,575 78.65% Equity One, Inc. 16,592 7.92 1,222,443 6.33 Popular Leasing 8,534 4.07 598,895 3.10 Banco Popular, Illinois 4,378 2.09 979,132 5.07 Popular Securities 2,325 1.11 651,565 3.38 Popular Finance 4,437 2.12 152,514 0.79 Banco Popular, FSB 933 0.45 338,896 1.76 Popular Home Mortgage 1,951 0.93 144,782 0.75 Banco Popular, N.A. (California) 664 0.32 141,734 0.73 Banco Popular, N.A. (Florida) (8,861) (4.23) 67,717 0.35 Parent Company, other subsidiaries and eliminations (113) (0.06) (176,746) (0.91) ---------------------------------------------------------------- Total $209,565 100.00% $19,300,507 100.00% ================================================================
Consumer Credit Risk - Consumer credit risk arises from exposures to credit card receivables, home mortgages, personal loans and other installment credit facilities. At December 31, 1997, consumer and residential mortgage loans amounted to $3.1 billion and $2.8 billion, respectively, with $964 million in unused credits card lines. At December 31, 1997, the secured consumer loan portfolio was $1.4 billion or 46.2% of the total consumer portfolio. Industry Risk - Total commercial loans, including commercial real estate and construction loans, amounted to $4.9 billion at year-end. The Corporation's strategy to emphasize the use of collateral has resulted in a secured commercial and construction loan portfolio comprised of approximately $1.4 billion, or 28.2% of the total commercial and construction loan portfolios. These loans are secured by real estate, consisting primarily of residential, owner-occupied and income producing properties. Furthermore, commercial and construction loans secured by cash collateral totaled $206 million, or 4.2% of the commercial and construction portfolio at the end of 1997. Also, at December 31, 1997, the Corporation had $1.7 billion in unused commitments under lines of credit to commercial, industrial and agricultural concerns. Commercial and standby letters of credit totaled $73 million at December 31, 1997. There are no significant concentrations in any one industry with a substantial portion of the customers having credit needs of less than $100,000. Government Risk - As of December 31, 1997, $4.1 billion of the investment securities represented exposure to the U.S. Government in the form of U.S. Treasury securities and obligations of U.S. Government agencies and corporations. In addition, $90 million of residential mortgages and $375 million in commercial loans were insured or guaranteed by the U.S. Government or its agencies. The Corporation is one of the largest SBA lenders in the United States. Furthermore, there was $114 million of investment securities representing obligations of the Puerto Rico Government and political subdivisions thereof, $63 million of loans issued to or guaranteed by these same entities and $32 million of loans issued to or guaranteed by the U.S. Virgin Islands' Government. NON-PERFORMING ASSETS Non-performing assets consist of past due loans on which no interest income is being accrued, renegotiated loans and other real estate. As shown in Table N, as of December 31, 1997, non-performing assets amounted to $212 million or 1.87% of loans, compared with $155 million or 1.58% of total loans and $155 million or 1.79% of total loans at the end of 1996 and 1995, respectively. Non-performing loans at December 31, 1997, totaled $194 million or 1.71% of loans as compared with $145 million or 1.49% a year earlier. As of December 31, 1995, non-performing loans were $144 million or 1.67% of loans. F-26 79 TABLE N Non-Performing Assets
As of December 31, - ------------------------------------------------------------------------------------------------------------------------------ (Dollars in thousands) 1997 1996 1995 1994 1993 ------------------------------------------------------------------------------- Commercial, industrial and agricultural........................ $105,880 $ 81,534 $ 87,250 $ 53,553 $ 49,517 Construction.......................... 2,704 2,000 4,733 7,994 8,215 Lease financing....................... 1,569 1,599 5,606 4,027 4,429 Mortgage.............................. 53,449 43,955 32,066 16,510 14,363 Consumer.............................. 30,840 16,320 14,827 12,179 16,290 Renegotiated accruing loans........... 6 3,308 2,742 2,982 5,643 Other real estate..................... 18,012 6,076 7,807 10,390 12,699 ------------------------------------------------------------------------------- Total .......................... $212,460 $154,792 $155,031 $107,635 $111,156 =============================================================================== Accruing loans past-due 90 days or more..................... $ 20,843 $ 12,270 $ 11,660 $ 15,012 $ 15,505 =============================================================================== Non-performing assets to loans........ 1.87% 1.58% 1.79% 1.38% 1.75% Non-performing loans to loans......... 1.71 1.49 1.67 1.21 1.46 Non-performing assets to assets....... 1.10 0.92 0.99 0.84 0.97 Interest lost......................... $ 11,868 $ 7,696 $ 7,135 $ 5,441 $ 4,992
Note: The Corporation's policy is to place commercial and construction loans on non-accrual status if payments of principal or interest are past-due 60 days or more. Lease financing receivables and conventional residential mortgage loans are placed on non-accrual status if payments are delinquent 90 days or more. Close-end consumer loans are placed on non-accrual when they become 90 days or more past-due and are charged-off when they are 120 days past-due. Open-end consumer loans are not placed on non-accrual status and are charged-off when they are 180 days past-due. Loans past-due 90 days or more and still accruing are not considered as non-performing loans. The increase in non-performing assets was reflected in non-performing commercial loans, consumer loans, other real estate owned and mortgage loans which rose $24 million, $15 million, $12 million and $9 million, respectively. The rise in the commercial non-performing portfolio was principally a result of the classification as non-accrual of an $11 million commercial income-producing real estate loan in the U.S. Virgin Islands and an increase of $13 million in the U.S. banking operations of the Corporation partially related to the acquisitions, with particular emphasis on the implementation of the Corporation's more conservative non-accrual policy, as further explained below. Also, the higher loan volume was a leading factor for the increase. The aforementioned commercial loan in the U.S. Virgin Islands was subsequently collected during the first quarter of 1998. The non-performing consumer loans increased principally as a result of the higher level of personal bankruptcies which caused an increase in delinquency levels. In the non-performing mortgage loan category, Equity One reached $25 million at December 31, 1997, an increase of $7 million when compared with $18 million at the same date last year. Most of this increase relates to its continued loan growth coupled with an increased level of personal bankruptcies in the mainland. Bankruptcy filings in the U.S. during the 12-month period ended on September 30, 1997, increased 23% over the same period a year before. The other real estate category increased $6 million at Equity One and $5 million at BPPR, mostly as a result of successful collection efforts through the legal process of several real estate secured loans. The Corporation reports its non-performing assets on a more conservative basis than most U.S. banks. The Corporation's policy is to place commercial loans on non-accrual status if payments of principal or interest are delinquent 60 days rather than the standard industry practice of 90 days. Financing leases, conventional mortgages and close-end consumer loans are placed on non-accrual status if payments are delinquent 90 days. Closed-end consumer loans are charged-off when payments are delinquent 120 days. Open end (revolving credit) consumer loans are charged-off if payments are delinquent 180 days. Certain loans which would be treated as non-accrual loans pursuant to the foregoing policy, are treated as accruing loans if they are considered well-secured and in the process of collection. Under the standard industry practice, close-end consumer loans are charged-off when delinquent 120 days, but are not customarily placed on non-accrual status prior to being charged-off. Assuming the standard industry practice of placing commercial loans on non-accrual status when payments of principal and interest are past due 90 days or more and excluding the closed-end consumer loans from non-accruing, the Corporation's non-performing assets at December 31, 1997, would have been $167 million or 1.47% of loans, and the allowance for loan losses would have been 126.9% of non-performing assets. At December 31, 1996 and 1995, adjusted non-performing assets would have F-27 80 TABLE O Allowance for Loan Losses and Selected Loan Losses Statistics
(Dollars in thousands) 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------ Balance at beginning of year............. $ 185,574 $ 168,393 $ 153,798 $ 133,437 $ 110,714 Allowances purchased..................... 13,237 402 3,473 1,580 Provision for loan losses................ 110,607 88,839 64,558 53,788 72,892 ---------------------------------------------------------------------------------- 309,418 257,634 218,356 190,698 185,186 ---------------------------------------------------------------------------------- Losses charged to the allowance: Commercial............................. 55,734 38,017 34,383 27,435 29,501 Construction........................... 600 2,369 2,046 1,794 3,060 Lease financing........................ 23,085 22,129 6,979 6,860 9,150 Mortgage............................... 2,612 2,189 1,618 1,310 477 Consumer............................... 65,559 43,257 33,681 29,545 35,239 ---------------------------------------------------------------------------------- 147,590 107,961 78,707 66,944 77,427 ---------------------------------------------------------------------------------- Recoveries: Commercial............................. 18,385 11,498 9,404 6,950 6,279 Construction........................... 122 207 288 1,374 607 Lease financing........................ 15,890 9,749 2,342 3,514 2,081 Mortgage............................... 356 295 243 5 36 Consumer............................... 15,070 14,152 16,467 18,201 16,675 ---------------------------------------------------------------------------------- 49,823 35,901 28,744 30,044 25,678 ---------------------------------------------------------------------------------- Net loans charged-off.................... 97,767 72,060 49,963 36,900 51,749 ---------------------------------------------------------------------------------- Balance at end of year................... $ 211,651 $ 185,574 $ 168,393 $ 153,798 $ 133,437 ================================================================================== Loans: Outstanding at year end................ $11,376,607 $9,779,028 $8,677,484 $7,781,329 $6,346,922 Average................................ 10,548,207 9,210,964 8,217,834 7,107,746 5,700,069 Ratios: Allowance for loan losses to year end loans............................ 1.86% 1.90% 1.94% 1.98% 2.10% Recoveries to charge-offs.............. 33.76 33.25 36.52 44.88 33.16 Net charge-offs to average loans......... 0.93 0.78 0.61 0.52 0.91 Net charge-offs earnings coverage...... 4.04X 4.79x 5.42x 6.21x 3.96x Allowance for loan losses to net charge-offs.......................... 2.16 2.58 3.37 4.17 2.58 Provision for loan losses to: Net charge-offs.................... 1.13 1.23 1.29 1.46 1.41 Average loans...................... 1.05% 0.96% 0.79% 0.76% 1.28% Allowance to non-performing assets..... 99.62 119.89 108.62 142.89 120.04 - ------------------------------------------------------------------------------------------------------------------------------
been $117 million or 1.19% of loans and $121 million or 1.39% of loans, respectively. The allowance for loan losses as a percentage of non-performing assets as of December 31, 1996 and 1995, would have been 159.0% and 139.6%, respectively. Accruing loans that are contractually past-due 90 days or more as to principal or interest, but are well-secured and in the process of collection as of December 31, 1997, amounted to $21 million as compared with $12 million in 1996 and 1995. Once a loan is placed in non-accrual status the interest previously accrued and uncollected is charged against current earnings and thereafter, income is recorded only to the extent of any interest collected. The interest income that would have been realized had these loans been performing in accordance with their original terms amounted to $11.9 million for 1997, compared with $7.7 million for 1996 and $7.1 million in 1995. F-28 81 ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is maintained at a level sufficient to provide for estimated loan losses based on evaluations of known and inherent risks in the loan portfolio. The Corporation's management evaluates the adequacy of the allowance for loan losses on a monthly basis. In determining the allowance, management considers the portfolio risk characteristics, prior loss experience, prevailing and projected economic conditions and loan impairment measurement. A loan is considered impaired when, based on the current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. At December 31, 1997 and 1996, the portion of the allowance for loan losses related to impaired loans was $19 million and $18 million, respectively. Please refer to Notes 1 and 6 to the Consolidated Financial Statements for further information related to impaired loans. At December 31, 1997, the allowance for loan losses was $212 million or 1.86% of loans, compared with $186 million or 1.90% at the same date in 1996. At December 31, 1995, the allowance was $168 million or 1.94% of loans. Based on current and expected economic conditions, the expected level of net loan losses and the methodology established to evaluate the adequacy of the allowance for loan losses, management considers that the Corporation continues enjoying an adequate position in its allowance for loan losses. Broken down by major loan categories, the allowance for the last five years was as follows:
ALLOWANCE FOR LOAN LOSSES AT DECEMBER 31, (IN MILLIONS) 1997 1996 1995 1994 1993 ----------------------------------------------------------------- Commercial $101.5 $ 91.8 $ 82.6 $ 73.8 $ 64.0 Construction 10.6 10.5 11.0 10.8 10.6 Lease financing 5.9 3.4 6.4 6.5 5.8 Consumer 82.8 69.6 60.6 56.7 52.0 Mortgage 10.9 10.3 7.8 6.0 1.0 ----------------------------------------------------------------- $211.7 $185.6 $168.4 $153.8 $133.4 =================================================================
Table O summarizes the movement in the allowance for loan losses and presents selected loan loss statistics for the past five years. As this table demonstrates, net loan losses for the year totaled $97.8 million or 0.93% of average loans, an increase of $25.7 million or 36.6% from $72.1 million or 0.78% of average loans in 1996. The rise primarily reflected higher net charge-offs in the consumer and commercial loan portfolios, partially offset by a reduction in net losses in the lease financing portfolio. Consumer loans net charge-offs totaled $50.5 million or 1.76% of average consumer loans for 1997, compared with $29.1 million, or 1.18% of average consumer loans for 1996. Within this category, personal loans reflected an increase of $14.3 million, from $15.6 million or 1.10% of average personal loans in 1996 to $29.9 million or 1.79% in 1997. This increase is the result of the growth of $254 million in the average personal loan portfolio together with the record breaking levels in personal bankruptcies during 1997. In addition, credit cards net losses amounted to $15.7 million or 3.08% of the average credit card portfolio as compared with $11.0 million or 2.49% in 1996. Commercial loans net charge-offs amounted to $37.3 million in 1997, compared with $26.5 million a year earlier. As a percentage of average commercial loans, this figure increased to 0.85% in 1997 from 0.77% in 1996. The increase in commercial loans net losses was influenced by the implementation of the Corporation's more conservative charge-off policy at the acquired banks and the portfolio growth. Net charge-offs in the mortgage portfolio totaled $2.3 million in 1997 compared with $1.9 million in 1996. Lease financings net charge-offs decreased $5.2 million, from $12.4 million or 2.45% of average lease financings in 1996 to $7.2 million or 1.30% in 1997, as a result of a more conservative charge-off policy implemented in 1996 by the Corporation's leasing subsidiary in Puerto Rico, which resulted in a subsequent increase in the level of recoveries in 1997 by $6.1 million, while charge-offs stabilized. However, the level of recoveries in the leasing portfolio should stabilize during 1998. F-29 82 STATISTICAL SUMMARY 1993-1997 POPULAR, INC. STATEMENTS OF CONDITION
As of December 31, (In thousands) 1997 1996 1995 1994 1993 --------------------------------------------------------------------- ASSETS Cash and due from banks.................................. $ 463,151 $ 492,368 $ 458,173 $ 442,316 $ 368,837 --------------------------------------------------------------------- Money market investments: Federal funds sold and securities and mortgages purchased under agreements to resell................. 802,803 778,597 796,417 265,000 247,333 Time deposits with other banks........................ 9,013 19,023 100 100 15,100 Bankers' acceptances.................................. 2,274 2,656 2,202 570 259 --------------------------------------------------------------------- 814,090 800,276 798,719 265,670 262,692 --------------------------------------------------------------------- Trading securities....................................... 222,303 292,150 330,674 1,670 3,017 --------------------------------------------------------------------- Investment securities available-for-sale, at market value and at lower of cost or market value before 1994.............................. 5,239,005 3,415,934 3,209,974 839,226 715,565 --------------------------------------------------------------------- Investment securities held-to-maturity, at cost 408,993 1,197,066 1,651,344 2,955,911 3,329,798 --------------------------------------------------------------------- Loans held-for-sale...................................... 265,204 255,129 112,806 10,296 --------------------------------------------------------------------- Loans.................................................... 11,457,675 9,854,911 8,883,963 8,066,954 6,655,072 Less-Unearned income............................. 346,272 331,012 319,285 295,921 308,150 Allowance for loan losses................... 211,651 185,574 168,393 153,798 133,437 --------------------------------------------------------------------- 10,899,752 9,338,325 8,396,285 7,617,235 6,213,485 --------------------------------------------------------------------- Premises and equipment................................... 364,892 356,697 325,203 324,160 298,089 Other real estate........................................ 18,012 6,076 7,807 10,390 12,699 Customers' liabilities on acceptances.................... 1,801 3,100 2,208 902 1,392 Accrued income receivable................................ 118,677 95,487 113,539 78,765 79,285 Other assets............................................. 252,040 380,247 125,742 103,088 95,763 Intangible assets........................................ 232,587 131,248 142,977 128,729 132,746 --------------------------------------------------------------------- $19,300,507 $16,764,103 $15,675,451 $12,778,358 $11,513,368 ===================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits: Non-interest bearing ................................ $ 2,546,836 $ 2,330,704 $ 2,021,658 $ 1,949,244 $ 1,848,859 Interest bearing .................................... 9,202,750 8,432,571 7,855,004 7,063,191 6,673,799 --------------------------------------------------------------------- 11,749,586 10,763,275 9,876,662 9,012,435 8,522,658 Federal funds purchased and securities sold under agreements to repurchase.................. 2,723,329 1,875,465 3,000,878 1,438,038 951,733 Other short-term borrowings........................... 1,287,435 1,404,006 454,707 573,841 664,173 Notes payable......................................... 1,403,696 986,713 730,428 459,524 253,855 Senior debentures..................................... 30,000 30,000 30,000 30,000 Acceptances outstanding............................... 1,801 3,100 2,208 902 1,392 Other liabilities..................................... 356,568 314,012 263,871 211,195 182,362 17,522,415 15,376,571 14,358,754 11,725,935 10,606,173 --------------------------------------------------------------------- Subordinated notes................................... 125,000 125,000 175,000 50,000 62,000 --------------------------------------------------------------------- Preferred stock of Banco Popular..................... 11,000 --------------------------------------------------------------------- Preferred beneficial interest in Popular North America's junior subordinated deferrable interest debentures guaranteed by the Corporation........................................ 150,000 --------------------------------------------------------------------- Stockholders' equity: Preferred stock....................................... 100,000 100,000 100,000 100,000 Common stock.......................................... 412,029 396,531 197,692 197,029 196,395 Surplus............................................... 602,023 496,582 427,282 409,445 386,622 Retained earnings..................................... 395,253 267,719 350,480 272,458 208,607 Treasury stock - at cost.............................. (39,559) Unrealized gains (losses) on investment............... securities available-for-sale, net of deferred taxes.. 33,346 1,700 16,243 (19,366) Capital reserves...................................... 50,000 42,857 42,571 --------------------------------------------------------------------- 1,503,092 1,262,532 1,141,697 1,002,423 834,195 --------------------------------------------------------------------- $19,300,507 $16,764,103 $15,675,451 $12,778,358 $11,513,368 =====================================================================
F-30 83 STATISTICAL SUMMARY 1993-1997 POPULAR, INC. STATEMENTS OF INCOME
For the year ended December 31, - ------------------------------------------------------------------------------------------------------------------------------- (In thousands, except per common share information) 1997 1996 1995 1994 1993 -------------------------------------------------------------------------- INTEREST INCOME: Loans.......................................... $1,080,408 $ 924,076 $ 813,137 $667,047 $549,388 Money market investments....................... 33,923 46,697 23,077 5,186 6,434 Investment securities.......................... 358,736 280,610 259,941 214,611 215,944 Trading account securities..................... 18,236 21,470 9,652 297 370 -------------------------------------------------------------------------- Total interest income....................... 1,491,303 1,272,853 1,105,807 887,141 772,136 Less - Interest expense........................ 707,348 591,540 521,624 351,633 280,008 -------------------------------------------------------------------------- Net interest income......................... 783,955 681,313 584,183 535,508 492,128 Provision for loan losses...................... 110,607 88,839 64,558 53,788 72,892 -------------------------------------------------------------------------- Net interest income after provision for loan losses........................... 673,348 592,474 519,625 481,720 419,236 Gain on sale of investment securities.......... 2,268 3,094 5,368 224 864 Trading account profit ........................ 3,934 108 1,785 227 554 All other operating income..................... 241,396 202,270 166,185 140,852 123,762 -------------------------------------------------------------------------- 920,946 797,946 692,963 623,023 544,416 -------------------------------------------------------------------------- OPERATING EXPENSES: Personnel costs................................ 306,893 273,247 249,075 225,747 215,911 All other operating expenses................... 330,027 268,672 237,758 222,099 196,365 -------------------------------------------------------------------------- 636,920 541,919 486,833 447,846 412,276 -------------------------------------------------------------------------- Income before tax, dividends on preferred stock of BPPR and cumulative effect of accounting changes................ 284,026 256,027 206,130 175,177 132,140 Income tax..................................... 74,461 70,877 59,769 50,043 28,151 -------------------------------------------------------------------------- Income before dividends on preferred stock of BPPR and cumulative effect of accounting changes................ 209,565 185,150 146,361 125,134 103,989 Dividends on preferred stock of BPPR........... 385 770 Income before cumulative effect of accounting changes.......................... 209,565 185,150 146,361 124,749 103,219 Cumulative effect of accounting changes........ 6,185 -------------------------------------------------------------------------- NET INCOME..................................... $ 209,565 $ 185,150 $ 146,361 $124,749 $109,404 ========================================================================== NET INCOME APPLICABLE TO COMMON STOCK.......... $ 201,215 $ 176,800 $ 138,011 $120,504 $109,404 ========================================================================== EARNINGS PER COMMON SHARE* Before effect of accounting changes......... $ 3.00 $ 2.68 $ 2.10 $ 1.84 $ 1.58 ========================================================================== Net income.................................. $ 3.00 $ 2.68 $ 2.10 $ 1.84 $ 1.67 ========================================================================== Dividends declared on common stock: Cash dividends per common share outstanding.... $ 0.80 $ 0.69 $ 0.58 $ 0.50 $ 0.45 ==========================================================================
*The average common shares used in the computation of earnings and cash dividend per common share were 67,018,482 for 1997; 66,022,312 for 1996; 65,816,300 for 1995; 65,596,486 for 1994; and 65,402,472 for 1993. F-31 84 STATISTICAL SUMMARY 1993-1997 AVERAGE BALANCE SHEET AND SUMMARY OF NET INTEREST INCOME ON A TAXABLE EQUIVALENT BASIS*
- ----------------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) 1997 1996 - ----------------------------------------------------------------------------------------------------------------------------------- AVERAGE AVERAGE Average Average BALANCE INTEREST RATE Balance Interest Rate ----------------------------------------------------------------------------- ASSETS Interest earning assets: Federal funds sold and securities and mortgages purchased under agreements to resell....................................... $ 595,715 $ 31,504 5.29% $ 878,138 $ 45,704 5.20% Time deposits with other banks.................... 34,271 2,181 6.36 12,562 770 6.13 Bankers' acceptances.............................. 2,463 238 9.66 2,202 223 10.13 ----------------------------------------------------------------------------- Total money market investments.................. 632,449 33,923 5.36 892,902 46,697 5.23 ----------------------------------------------------------------------------- U.S. Treasury securities.......................... 3,553,347 249,739 7.03 3,198,912 222,520 6.96 Obligations of other U.S. Government agencies and corporations....................... 967,973 69,709 7.20 531,711 34,725 6.53 Obligations of Puerto Rico, States and political subdivisions.......................... 141,625 9,716 6.86 231,363 11,224 4.85 Collateralized mortgage obligations and mortgage-backed securities...................... 1,150,214 72,245 6.28 772,278 46,434 6.01 Other .......................................... 114,201 7,718 6.76 95,985 5,483 5.71 ----------------------------------------------------------------------------- Total investment securities................... 5,927,360 409,127 6.90 4,830,249 320,386 6.63 ----------------------------------------------------------------------------- Trading account securities.......................... 301,618 19,770 6.55 372,196 23,004 6.18 ----------------------------------------------------------------------------- Loans (net of unearned income)...................... 10,548,207 1,087,466 10.31 9,210,964 930,891 10.11 ----------------------------------------------------------------------------- Total interest earning assets/ Interest income............................. 17,409,634 $1,550,286 8.90% 15,306,311 $1,320,978 8.63% ----------------------------------------------------------------------------- Total non-interest earning assets............. 1,009,510 994,771 ----------------------------------------------------------------------------- TOTAL ASSETS.................................. $18,419,144 $16,301,082 ============================================================================= LIABILITIES AND STOCKHOLDERS' EQUITY Interest bearing liabilities:....................... Savings and NOW accounts........................ $ 4,674,577 $ 147,321 3.15% $ 4,244,625 $ 131,499 3.10% Other time deposits............................... 4,023,313 219,207 5.45 4,163,416 218,722 5.25 Short-term borrowings............................ 4,280,900 237,738 5.55 3,464,892 184,682 5.33 Mortgages and notes payable...................... 1,345,650 83,936 6.24 757,604 46,417 6.13 Subordinated notes............................... 125,000 8,558 6.85 147,951 10,220 6.91 Guaranteed preferred beneficial interest in Popular North America's subordinated debentures..................................... 122,877 10,588 8.62 ----------------------------------------------------------------------------- Total interest bearing liabilities/ Interest expense........................... 14,572,317 707,348 4.85 12,778,488 591,540 4.63 ----------------------------------------------------------------------------- Total non-interest bearing liabilities....... 2,475,843 2,328,083 ----------------------------------------------------------------------------- Total liabilities............................ 17,048,160 15,106,571 ----------------------------------------------------------------------------- Preferred stock of BPPR.......................... ----------------------------------------------------------------------------- Stockholders' equity................................ 1,370,984 1,194,511 ----------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.......... $18,419,144 $16,301,082 ============================================================================= Net interest income on a taxable equivalent basis.................................. $ 842,938 $ 729,438 ----------------------------------------------------------------------------- Cost of funding earning assets...................... 4.06% 3.86% ----------------------------------------------------------------------------- Net interest yield.................................. 4.84% 4.77% ============================================================================= Effect of the taxable equivalent adjustment..... 58,983 48,125 ----------------------------------------------------------------------------- Net interest income per books....................... $ 783,955 $ 618,313 =============================================================================
* Shows the effect of the tax exempt status of some loans and investments on their yield, using the applicable statutory income tax rates. The computation considers the interest expense disallowance as required by the Puerto Rico Internal Revenue Code. This adjustment is shown in order to compare the yields of the tax exempt and taxable assets on a taxable basis. Note: Average loan balances include the average balance of non-accruing loans. No interest income is recognized for these loans in accordance with the Corporation's policy. F-32 85 POPULAR, INC.
- ----------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------- 1995 1994 1993 - ----------------------------------------------------------------------------------------------------------------------- Average Average Average Average Average Average Balance Interest Rate Balance Interest Rate Balance Interest Rate - ----------------------------------------------------------------------------------------------------------------------- $ 399,413 $ 22,823 5.71% $ 114,215 $ 4,858 4.25% $ 117,095 $ 4,115 3.51% 2,661 165 6.20 4,916 300 6.10 57,845 2,259 3.91 941 89 9.46 332 28 8.43 871 60 6.89 - ----------------------------------------------------------------------------------------------------------------------- 403,015 23,077 5.73 119,463 5,186 4.34 175,811 6,434 3.66 - ----------------------------------------------------------------------------------------------------------------------- 2,893,797 197,554 6.83 2,657,975 164,102 6.17 2,985,634 202,695 6.79 428,563 30,912 7.21 526,687 33,969 6.45 274,821 18,033 6.56 247,176 14,798 5.99 259,534 14,074 5.42 227,784 14,253 6.26 727,175 47,191 6.49 171,013 6,491 3.80 712,972 37,535 5.26 523,224 26,944 5.15 - ----------------------------------------------------------------------------------------------------------------------- 4,467,724 296,946 6.65 4,157,168 249,680 6.01 4,011,463 261,925 6.53 - ----------------------------------------------------------------------------------------------------------------------- 155,597 9,831 6.32 5,303 368 6.94 7,319 449 6.13 - ----------------------------------------------------------------------------------------------------------------------- 8,217,834 820,003 9.98 7,107,746 672,974 9.47 5,700,069 555,671 9.75 - ----------------------------------------------------------------------------------------------------------------------- 13,244,170 $1,149,857 8.68% 11,389,680 $928,208 8.15% 9,894,662 $824,479 8.33% - ----------------------------------------------------------------------------------------------------------------------- 874,013 835,850 789,091 - ----------------------------------------------------------------------------------------------------------------------- $14,118,183 $12,225,530 $10,683,753 ======================================================================================================================= $ 4,015,973 $ 126,548 3.15% $ 3,972,406 $116,858 2.94% $ 3,570,920 $107,454 3.01% 3,720,473 203,235 5.46 3,069,130 130,868 4.26 2,918,625 111,994 3.84 2,600,246 141,522 5.44 1,856,649 77,537 4.18 1,337,970 42,392 3.17 598,027 46,149 7.72 376,570 22,420 5.95 195,522 12,801 6.55 56,850 4,170 7.34 56,082 3,950 7.04 73,967 5,367 7.26 - ----------------------------------------------------------------------------------------------------------------------- 10,991,569 521,624 4.75 9,330,837 351,633 3.77 8,097,004 280,008 3.46 - ----------------------------------------------------------------------------------------------------------------------- 2,056,132 1,964,399 1,782,748 - ----------------------------------------------------------------------------------------------------------------------- 13,047,701 11,295,236 9,879,752 - ----------------------------------------------------------------------------------------------------------------------- 5,425 11,000 - ----------------------------------------------------------------------------------------------------------------------- 1,070,482 924,869 793,001 - ----------------------------------------------------------------------------------------------------------------------- $14,118,183 $12,225,530 $10,683,753 ======================================================================================================================= $ 628,233 $576,575 $544,471 - ----------------------------------------------------------------------------------------------------------------------- 3.94% 3.09% 2.83% - ----------------------------------------------------------------------------------------------------------------------- 4.74% 5.06% 5.50% ======================================================================================================================= 44,050 41,067 52,343 - ----------------------------------------------------------------------------------------------------------------------- $ 584,183 $535,508 $492,128 =======================================================================================================================
F-33 86 STATISTICAL SUMMARY 1995-1997 POPULAR, INC. QUARTERLY FINANCIAL DATA
1997 1996 - -------------------------------------------------------------------------------------------------------- FOURTH THIRD SECOND FIRST Fourth Third QUARTER QUARTER QUARTER QUARTER Quarter Quarter - -------------------------------------------------------------------------------------------------------- SUMMARY OF OPERATIONS (In thousands, except per common share information) Interest income ............ $404,619 $393,414 $359,005 $ 334,265 $ 332,854 $327,097 Interest expense ........... 194,919 190,409 168,399 153,621 154,445 154,861 ------------------------------------------------------------------------ Net interest income ...... 209,700 203,005 190,606 180,644 178,409 172,236 Provision for loan losses ................... 31,657 29,849 25,413 23,688 23,458 22,436 Non-interest income ........ 68,684 65,790 54,941 55,915 55,291 46,488 Gain (loss) on sale of investment securities .... 2,122 519 1,286 (1,659) (2,525) 4,911 Non-interest expense ....... 175,408 167,341 152,046 142,125 143,923 135,453 ------------------------------------------------------------------------ Income before income tax ...................... 73,441 72,124 69,374 69,087 63,794 65,746 Income taxes ............... 18,119 18,511 18,283 19,548 16,114 19,473 ------------------------------------------------------------------------ Net income ................. $ 55,322 $ 53,613 $ 51,091 $ 49,539 $ 47,680 $ 46,273 ======================================================================== Net income applicable to common stock .......... $ 53,234 $ 51,526 $ 49,003 $ 47,452 $ 45,593 $ 44,186 ======================================================================== Net income per common share .......... $ 0.78 $ 0.76 $ 0.74 $ 0.72 $ 0.69 $ 0.67 ------------------------------------------------------------------------ SELECTED AVERAGE BALANCES (In millions) Total assets ............... $ 19,745 $ 19,348 $ 17,625 $ 16,917 $ 16,852 $ 16,796 Loans ...................... 11,196 11,034 10,164 9,778 9,668 9,387 Interest earning assets .... 18,698 18,315 16,729 15,856 15,794 15,769 Deposits ................... 11,536 11,318 10,620 10,477 10,767 10,548 Interest bearing liabilities 15,717 15,639 13,737 13,147 13,145 13,285 ------------------------------------------------------------------------ SELECTED RATIOS Return on assets ........... 1.11% 1.10% 1.16% 1.19% 1.13% 1.10% Return on equity ........... 15.56 15.46 16.07 16.32 15.76 15.94
1996 1995 - ------------------------------------------------------------------------------------------------------- Second First Fourth Third Second First Quarter Quarter Quarter Quarter Quarter Quarter - ------------------------------------------------------------------------------------------------------- SUMMARY OF OPERATIONS (In thousands, except per common share information) Interest income ............ $309,975 $302,927 $298,311 $ 288,459 $ 268,818 $250,219 Interest expense ........... 141,767 140,467 142,191 140,044 126,698 112,691 ------------------------------------------------------------------------ Net interest income ...... 168,208 162,460 156,120 148,415 142,120 137,528 Provision for loan losses ................... 21,672 21,273 21,227 18,987 12,646 11,698 Non-interest income ........ 49,335 51,263 45,276 44,881 40,306 37,507 Gain (loss) on sale of investment securities .... (20) 729 3,306 1,950 66 46 Non-interest expense ....... 131,844 130,699 124,197 119,596 124,722 118,318 ----------------------------------------------------------------------- Income before income tax ...................... 64,007 62,480 59,278 56,663 45,124 45,065 Income taxes ............... 17,952 17,338 19,026 18,356 11,063 11,324 ---------------------------------------------------------------------- Net income ................. $ 46,055 $ 45,142 $ 40,252 $ 38,307 $ 34,061 $ 33,741 ======================================================================== Net income applicable to common stock .......... $ 43,967 $ 43,055 $ 38,164 $ 36,220 $ 31,973 $ 31,654 ======================================================================== Net income per common share .......... $ 0.67 $ 0.65 $ 0.58 $ 0.55 $ 0.49 $ 0.48 ------------------------------------------------------------------------ SELECTED AVERAGE BALANCES (In millions) Total assets ............... $ 15,988 $ 15,557 $ 15,183 $ 14,709 $ 13,616 $ 12,934 Loans ...................... 9,033 8,749 8,548 8,360 8,090 7,864 Interest earning assets .... 15,020 14,631 14,276 13,788 12,815 12,068 Deposits ................... 10,474 10,055 9,848 9,614 9,615 9,245 Interest bearing liabilities 12,464 12,210 11,912 11,596 10,552 9,871 ------------------------------------------------------------------------ SELECTED RATIOS Return on assets ........... 1.16% 1.17% 1.05% 1.03% 1.00% 1.06% Return on equity ........... 16.56 16.39 14.82 14.55 13.47 13.96
F-34 87 GLOSSARY OF TERMS 936 CORPORATIONS - Subsidiaries of U.S. firms operating in Puerto Rico and other offshore areas under Section 936 of the U.S. Internal Revenue Code. Section 936 provided certain tax benefits on Puerto Rico source earnings from the active conduct of a trade or business or from qualified investments. In August 1996, the U.S. Congress repealed Section 936 with a phase-out period of 10 years on the credit from earnings from active conduct of trade or business and repealed the exemption on qualified investment income. 936 DEPOSITS - Funds of 936 corporations deposited in banks usually in the form of time deposits. The restriction that these funds must be reinvested in eligible assets, if income derived from them was to be considered tax-exempt for U.S. and Puerto Rico's Industrial Incentive Act purposes, used to lower the rate on these funds as compared with interest rates paid on similar deposits. In August 1996, the U.S. Congress approved legislation that repealed the federal tax exemption on these funds, effective July 1, 1996, for taxable years beginning after December 31, 1995. BASIS POINT - Equals to one-hundredth of one percent. Used to express changes or differences in interest yields and rates. CORE DEPOSITS - A deposit category that includes all non-interest bearing deposits, savings deposits and certificates of deposit under $100,000. These deposits are considered a stable source of funds. EARNING ASSETS - Assets that earn interest, such as loans, investment securities, money market investments and trading account securities. EARNINGS PER COMMON SHARE - Net income less dividends on preferred stock of the Corporation, divided by the average number of common shares outstanding during the periods presented. ELIGIBLE ACTIVITIES - Loans, investments and other authorized uses of funds deposited by 936 Corporations, required by the related regulation, to promote activity in certain economic areas. GAP - The difference that exists at a specific period of time between the maturities or repricing terms of interest-sensitive assets and interest-sensitive liabilities. INTEREST-BEARING LIABILITIES - Liabilities on which interest is paid such as saving deposits, certificates of deposit, other time deposits, borrowings, subordinated notes and capital securities. INTEREST-SENSITIVE ASSETS/LIABILITIES - Interest-earning assets/interest-bearing liabilities for which interest rates are adjustable within a specified time period due to maturity or contractual arrangements. LEVERAGE RATIO - Ratio adopted by the Federal Reserve System to assist in the assessment of the capital adequacy of state member banks. This ratio is calculated by dividing Tier I capital by quarterly average assets. The quarterly average assets are reduced by goodwill, any other intangible asset deducted from Tier I capital and the disallowed portion of deferred tax assets. LIQUIDITY - A combination of assets that assures currently available supplies of funds necessary to meet deposit withdrawals, loan demand and repayment of borrowings as they become due. The need for liquid funds is normally satisfied from daily operations and the maturity management of money market investments and investment securities as well as from available sources of financing. NET CHARGE-OFFS - The amount of loans written-off as uncollectible, net of the recovery of loans previously written-off. NET INCOME APPLICABLE TO COMMON STOCK - Net income less dividends paid on the Corporation's preferred stock. NET INTEREST INCOME - The difference between interest income and fees on earning assets and interest expense on liabilities. NET INTEREST YIELD - A percentage computed by dividing net interest income by average earning assets. NON-PERFORMING ASSETS - Includes loans on which the accrual of interest income has been discontinued due to default on interest and/or principal payments or other factors indicative of doubtful collection, renegotiated loans and foreclosed real estate properties. RETURN ON ASSETS - Net income as a percentage of average total assets. RETURN ON EQUITY - Net income applicable to common stock as a percentage of average common stockholders' equity. F-35 88 RISK-BASED CAPITAL - Guidelines for the regulatory measurement of capital adequacy. These guidelines set forth how capital is to be measured and how total assets are to be risk-adjusted. Total risk-adjusted assets include assets and off-balance sheet items adjusted by the appropriate credit risk category, based on the type of obligor or, where relevant, the guarantor, or the nature of the collateral. SPREAD - A percentage difference or margin between the yield on earning assets and the effective interest rate paid on interest-bearing liabilities. STOCKHOLDERS' EQUITY - Excess of assets over liabilities that constitutes the stockholders ownership participation in the Corporation's financial resources. SUPPLEMENTARY (TIER II) CAPITAL - Consists of the allowance for loan losses and qualifying term subordinated notes. TANGIBLE EQUITY - Consists of stockholders' equity less intangible assets. TAXABLE EQUIVALENT BASIS - An adjustment of income on tax-exempt earning assets to an amount that would yield the same after-tax income had the income been subject to taxation. The result is to equate the true earnings value of tax-exempt and taxable income. TIER I CAPITAL - Consists of common stockholders' equity (including the related surplus, retained earnings and capital reserves), non-cumulative perpetual preferred stock less goodwill, other non-qualifying intangible assets and the disallowed portion of deferred tax assets. YIELD - Percentage denoting actual return on earning assets. F-36 89 REPORT OF INDEPENDENT ACCOUNTANTS San Juan, Puerto Rico February 20, 1998 To the Board of Directors and Stockholders of Popular, Inc. In our opinion, the accompanying consolidated statements of condition and the related consolidated statements of income, of cash flows and of changes in stockholders' equity present fairly, in all material respects, the financial position of Popular, Inc. and its subsidiaries at December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Corporation's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /S/ Price Waterhouse Price Waterhouse Stamp 1457872 of the P.R. Society of Certified Public Accountants has been affixed to the file copy of this report. F-37 90 CONSOLIDATED STATEMENTS OF CONDITION POPULAR, INC.
December 31, ---------------------------- 1997 1996 - --------------------------------------------------------------------------------------------------------------- (Dollars in thousands, except per share information) ASSETS Cash and due from banks ........................................................ $ 463,151 $ 492,368 --------------------------- Money market investments: Federal funds sold and securities and mortgages purchased under agreements to resell ....................................................... 802,803 778,597 Time deposits with other banks .............................................. 9,013 19,023 Bankers' acceptances ........................................................ 2,274 2,656 --------------------------- 814,090 800,276 --------------------------- Trading securities, at market value ............................................ 222,303 292,150 --------------------------- Investment securities available-for-sale, at market value ...................... 5,239,005 3,415,934 --------------------------- Investment securities held-to-maturity, at cost (market value $409,798; 1996 - $1,197,641) .......................................................... 408,993 1,197,066 --------------------------- Loans held-for-sale ............................................................ 265,204 255,129 --------------------------- Loans .......................................................................... 11,457,675 9,854,911 Less - Unearned income ...................................................... 346,272 331,012 Allowance for loan losses ............................................ 211,651 185,574 --------------------------- 10,899,752 9,338,325 --------------------------- Premises and equipment ......................................................... 364,892 356,697 Other real estate .............................................................. 18,012 6,076 Customers' liabilities on acceptances .......................................... 1,801 3,100 Accrued income receivable ...................................................... 118,677 95,487 Other assets ................................................................... 252,040 380,247 Intangible assets .............................................................. 232,587 131,248 --------------------------- $ 19,300,507 $16,764,103 =========================== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits: Non-interest bearing ....................................................... $ 2,546,836 $ 2,330,704 Interest bearing ........................................................... 9,202,750 8,432,571 --------------------------- 11,749,586 10,763,275 Federal funds purchased and securities sold under agreements to repurchase .. 2,723,329 1,875,465 Other short-term borrowings ................................................. 1,287,435 1,404,006 Notes payable ............................................................... 1,403,696 986,713 Senior debentures ........................................................... 30,000 Acceptances outstanding ..................................................... 1,801 3,100 Other liabilities ........................................................... 356,568 314,012 --------------------------- 17,522,415 15,376,571 --------------------------- Subordinated notes .......................................................... 125,000 125,000 --------------------------- Preferred beneficial interest in Popular North America's junior subordinated deferrable interest debentures guaranteed by the Corporation ............. 150,000 --------------------------- Stockholders' equity: Preferred stock, $25 liquidation value; 10,000,000 shares authorized; 4,000,000 issued and outstanding ........................................... 100,000 100,000 Common stock, $6 par value; authorized 180,000,000 shares; issued and outstanding 67,682,704 (1996 - 66,088,506) ...................... 412,029 396,531 Surplus ..................................................................... 602,023 496,582 Retained earnings ........................................................... 395,253 267,719 Treasury stock-at cost ...................................................... (39,559) Unrealized gains on investment securities available-for-sale, net of deferred taxes of $11,180 (1996 - $1,490) ........................................... 33,346 1,700 --------------------------- 1,503,092 1,262,532 --------------------------- $ 19,300,507 $16,764,103 ===========================
The accompanying notes are an integral part of the consolidated financial statements. F-38 91 CONSOLIDATED STATEMENTS OF INCOME POPULAR, INC.
Year ended December 31, ----------------------------------------- 1997 1996 1995 - --------------------------------------------------------------------------------------------------------- (In thousands, except per share information) INTEREST INCOME: Loans .................................................... $1,080,408 $ 924,076 $ 813,137 Money market investments ................................. 33,923 46,697 23,077 Investment securities .................................... 358,736 280,610 259,941 Trading securities ....................................... 18,236 21,470 9,652 ----------------------------------------- 1,491,303 1,272,853 1,105,807 ----------------------------------------- INTEREST EXPENSE: Deposits ................................................. 366,528 350,221 329,783 Short-term borrowings .................................... 237,738 184,682 141,522 Long-term debt ........................................... 103,082 56,637 50,319 ----------------------------------------- 707,348 591,540 521,624 ----------------------------------------- Net interest income ........................................ 783,955 681,313 584,183 Provision for loan losses .................................. 110,607 88,839 64,558 ----------------------------------------- Net interest income after provision for loan losses ........ 673,348 592,474 519,625 Service charges on deposit accounts ...................... 94,141 85,846 78,607 Other service fees ....................................... 98,650 77,071 63,725 Gain on sale of investment securities .................... 2,268 3,094 5,368 Trading account profit ................................... 3,934 108 1,785 Other operating income ................................... 48,605 39,353 23,853 ----------------------------------------- 920,946 797,946 692,963 ----------------------------------------- OPERATING EXPENSES: Personnel costs: Salaries ................................................ 211,741 185,946 172,504 Profit sharing .......................................... 25,684 22,692 19,003 Pension and other benefits .............................. 69,468 64,609 57,568 ----------------------------------------- 306,893 273,247 249,075 Net occupancy expense .................................... 39,617 36,899 32,850 Equipment expenses ....................................... 66,446 57,186 47,854 Other taxes .............................................. 30,283 23,214 20,872 Professional fees ........................................ 46,767 36,953 28,677 Communications ........................................... 33,325 26,470 23,106 Business promotion ....................................... 33,569 26,229 17,801 Printing and supplies .................................... 15,539 11,964 11,069 Other operating expenses ................................. 41,607 31,703 35,325 Amortization of intangibles .............................. 22,874 18,054 20,204 ----------------------------------------- 636,920 541,919 486,833 ----------------------------------------- Income before income tax ................................... 284,026 256,027 206,130 Income tax ................................................. 74,461 70,877 59,769 ----------------------------------------- NET INCOME.................................................. $ 209,565 $ 185,150 $ 146,361 ========================================= NEW INCOME APPLICABLE TO COMMON STOCK ...................... $ 201,215 $ 176,800 $ 138,011 ========================================= EARNINGS PER COMMON SHARE: NEW INCOME .............................................. $ 3.00 $ 2.68 $ 2.10 =========================================
The accompanying notes are an integral part of the consolidated financial statements. F-39 92 CONSOLIDATED STATEMENTS OF CASH FLOWS POPULAR, INC.
Year ended December 31, ---------------------------------------- 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income .................................................... $ 209,565 $ 185,150 $ 146,361 ---------------------------------------- Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization of premises and equipment ... 54,523 48,481 44,448 Provision for loan losses ................................. 110,607 88,839 64,558 Amortization of intangibles ............................... 22,874 18,054 20,204 Gain on sale of investment securities available-for-sale .. (2,268) (3,094) (5,368) Loss (gain) on disposition of premises and equipment ...... 2,681 (123) 150 Gain on sale of loans ..................................... (23,315) (11,060) (8,966) Amortization of premiums and accretion of discounts on investments .......................................... 2,746 8,538 (2,325) Amortization of deferred loan origination fees and costs .. (3,019) (3,096) 7,131 Net decrease (increase) in trading securities ............ 69,847 38,524 (97,973) Increase in loans held-for-sale ........................... (10,075) (142,323) (36,244) Net (increase) decrease in accrued income receivable ...... (15,872) 18,665 (24,378) Net decrease (increase) in other assets ................... 175,286 (221,070) (8,640) Net increase in interest payable .......................... 6,668 11,765 2,077 Net (decrease) increase in current and deferred taxes ..... (28,555) (19,979) 1,410 Net increase in postretirement benefit obligation ......... 7,323 7,977 6,979 Net increase in other liabilities ......................... 4,887 29,284 6,121 ---------------------------------------- Total adjustments .................................. 374,338 (130,618) (30,816) ---------------------------------------- Net cash provided by operating activities .......... 583,903 54,532 115,545 ---------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Net decrease in money market investments ...................... 9,671 11,110 44,298 Purchases of investment securities held-to-maturity ........... (68,040,431) (28,849,896) (11,665,837) Maturities of investment securities held-to-maturity .......... 68,835,925 29,302,469 11,754,330 Purchases of investment securities available-for-sale ......... (8,635,781) (5,396,828) (1,367,401) Maturities of investment securities available-for-sale ........ 2,191,521 2,297,528 86,379 Sales of investment securities available-for-sale ............. 5,212,194 2,896,060 286,045 Net disbursements on loans .................................... (1,468,552) (1,501,808) (1,155,497) Proceeds from sale of loans ................................... 521,853 515,357 244,682 Acquisition of loan portfolios ................................ (48,481) (16,983) (66,922) Assets acquired, net of cash .................................. (83,404) (7,164) (29,189) Acquisition of premises and equipment ......................... (120,226) (86,162) (51,318) Proceeds from sale of premises and equipment .................. 68,082 9,662 6,888 ---------------------------------------- Net cash used in investing activities .............. (1,557,629) (826,655) (1,913,542) ---------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net (decrease) increase in deposits ........................... (68,957) 823,907 680,847 Net deposits acquired ......................................... 163,504 Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase .............. 790,607 (1,125,413) 771,382 Net (decrease) increase in other short-term borrowings ........ (116,571) 949,300 (144,028) Proceeds from issuance of notes payable ....................... 1,246,237 423,670 258,181 Payment of notes payable ...................................... (932,853) (167,385) (11) Payment of senior debentures .................................. (30,000) Payment of subordinated notes ................................. (50,000) Proceeds from issuance of Capital Securities .................. 150,000 Proceeds from issuance of subordinated notes .................. 125,000 Dividends paid ................................................ (59,037) (51,896) (44,521) Proceeds from issuance of common stock ........................ 4,642 4,135 3,500 Treasury stock acquired ....................................... (39,559) ---------------------------------------- Net cash provided by financing activities .......... 944,509 806,318 1,813,854 ---------------------------------------- Net (decrease) increase in cash and due from banks .............. (29,217) 34,195 15,857 Cash and due from banks at beginning of period .................. 492,368 458,173 442,316 ---------------------------------------- Cash and due from banks at end of period ........................ $ 463,151 $ 492,368 $ 458,173 ========================================
The accompanying notes are an integral part of the consolidated financial statements. F-40 93 CONSOLIDATED STATEMENTS OF CHANGES POPULAR, INC. IN STOCKHOLDERS' EQUITY
Year ended December 31, ---------------------------------------- 1997 1996 1995 - -------------------------------------------------------------------------------------------------------------- (In thousands) PREFERRED STOCK Balance at beginning and end of year .......................... $ 100,000 $ 100,000 $ 100,000 ---------------------------------------- COMMON STOCK Balance at beginning of year .................................. 396,531 197,692 197,029 Transfer from retained earnings resulting from stock split .... 198,004 Common stock issued in acquisitions ........................... 14,774 Common stock issued under Dividend Reinvestment Plan .......... 724 835 663 ---------------------------------------- Balance at end of year .............................. 412,029 396,531 197,692 ---------------------------------------- SURPLUS: Balance at beginning of year .................................. 496,582 427,282 409,445 Proceeds from common stock issued under Dividend Reinvestment Plan .................................. 3,918 3,300 2,837 Common stock issued in acquisitions ........................... 81,523 Transfer from retained earnings ............................... 20,000 16,000 15,000 Transfer from capital reserves ................................ 50,000 ---------------------------------------- Balance at end of year ............................. 602,023 496,582 427,282 ---------------------------------------- RETAINED EARNINGS: Balance at beginning of year .................................. 267,719 350,480 272,458 Net income .................................................... 209,565 185,150 146,361 Cash dividends declared on common stock ....................... (53,681) (45,557) (37,846) Cash dividends declared on preferred stock .................... (8,350) (8,350) (8,350) Transfer to common stock resulting from stock split ........... (198,004) Transfer to capital reserves .................................. (7,143) Transfer to surplus ........................................... (20,000) (16,000) (15,000) ---------------------------------------- Balance at end of year ............................. 395,253 267,719 350,480 ---------------------------------------- UNREALIZED HOLDING GAINS (LOSSES) ON SECURITIES AVAILABLE-FOR-SALE, NET OF DEFERRED TAXES: Balance at beginning of year .................................. 1,700 16,243 (19,366) Net change in the fair value of investment securities available-for-sale, net of deferred taxes ................... 31,646 (14,543) 35,609 ---------------------------------------- Balance at end of year ............................. 33,346 1,700 16,243 ---------------------------------------- TREASURY STOCK-AT COST .......................................... (39,559) ---------------------------------------- CAPITAL RESERVES: Balance at beginning of year .................................. 50,000 42,857 Transfer from retained earnings ............................... 7,143 Transfer to surplus ........................................... (50,000) ---------------------------------------- Balance at end of year ............................. 50,000 ---------------------------------------- Total stockholders' equity ...................................... $1,503,092 $1,262,532 $1,141,697 ========================================
The accompanying notes are an integral part of the consolidated financial statements. F-41 94 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS POPULAR, INC. NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: The accounting and reporting policies of Popular, Inc. (formerly BanPonce Corporation) and its subsidiaries (the Corporation) conform with generally accepted accounting principles and with general practices within the banking industry. The following is a description of the more significant of these policies: CONSOLIDATION The consolidated financial statements include the accounts of Popular, Inc. and its wholly-owned subsidiaries. The following summarizes the Corporation's organization: - Popular, Inc. (holding company) - Banco Popular de Puerto Rico (BPPR) - Popular Leasing and Rental, Inc. - Popular Finance, Inc. - Popular Mortgage, Inc. - Popular Securities Incorporated - Popular International Bank, Inc. - ATH Costa Rica - Popular North America, Inc. - Banco Popular, N.A. (California) - Banco Popular, N.A. (Florida) - Banco Popular, N.A. (Texas) - Banco Popular North America - Banco Popular, Illinois -Popular Leasing, USA - Banco Popular, FSB - Equity One All intercompany accounts and transactions have been eliminated in consolidation. ACQUISITIONS On April 30, 1997, the Corporation acquired Seminole National Bank in Sanford, Florida. At the date of acquisition, this bank operated three branches in Sanford and Orlando, with $19 million in loans and $23 million in deposits. On May 31, 1997, the Corporation acquired National Bancorp, Inc., the holding company of American Midwest Bank located in Chicago, Illinois. As part of this acquisition each outstanding share of National Bancorp, Inc. was converted into 8,678 shares of the Corporation's common stock, resulting in the issuance of 918,263 common shares. Also, on May 31, 1997, the Corporation completed the acquisition of CBC Bancorp, which had two banking subsidiaries, Capitol Bank & Trust and Capitol Bank of Westmont. These acquisitions in the State of Illinois added $261 million in loans and $408 million in deposits. On June 30, 1997, the Corporation completed the acquisition of Roig Commercial Bank (RCB), headquartered in Humacao, Puerto Rico. The merger agreement stipulated a payment of 50% in cash and the other 50% in common stock of Popular, Inc. Each outstanding share of RCB was converted into 5.14695 shares of the Corporation's common stock or $208.12987 in cash depending on RCB's shareholders' elections. As a result, 1,544,009 common shares of the Corporation were issued to RCB's shareholders. This acquisition added $361 million in loans and $584 million in deposits. On December 1, 1997, the Corporation acquired Houston Bancorporation, the holding company of Citizens National Bank. This bank operated one branch located in Houston, Texas. This acquisition added $39 million in loans and $45 million in deposits. In September 1996, the Corporation completed the acquisition of Banco Popular, N.A. (California), formerly Commerce National Bank, adding $23 million in loans and $63 million in deposits. At the acquisition date, this bank operated three branches located in City of Commerce, Montebello and Downey. All of the above acquisitions were accounted for as purchases and therefore results were included in the consolidated statements of income from the date of acquisition. F-42 95 NATURE OF OPERATIONS Popular, Inc. is a bank holding company which provides a wide variety of financial services through its subsidiaries. BPPR, the Corporation's largest banking subsidiary, is a full-service commercial bank and Puerto Rico's largest banking institution, with a delivery system of 201 branches throughout Puerto Rico, 29 branches in New York, seven branches in the U.S. Virgin Islands and one branch in the British Virgin Islands. Banco Popular, Illinois, a banking subsidiary of Banco Popular North America, operates 13 branches in the State of Illinois, Banco Popular, N.A. (California), operates six branches in the State of California, Banco Popular, N.A. (Florida) operates six branches in the State of Florida, while Banco Popular, N.A. (Texas) operates one branch in the State of Texas. In addition, Banco Popular, FSB, a federal savings bank, operates eight branches in the State of New Jersey. Also, the Corporation offers consumer finance services through its subsidiaries, Equity One, Inc., Popular Mortgage, Inc. and Popular Finance, Inc. Equity One, Inc. is a diversified mortgage and consumer finance company engaged in the business of granting personal and mortgage loans and providing dealer financing through 117 offices located in 30 states in the U.S. mainland. Popular Mortgage is a mortgage loan company with three offices in Puerto Rico, and Popular Finance, Inc. is a small loan company with 44 offices in Puerto Rico. The Corporation is also engaged in vehicle and equipment leasing, through 10 offices in Puerto Rico operated by Popular Leasing and Rental, Inc. and equipment leasing through seven offices operated by Popular Leasing, USA. Moreover, the Corporation is engaged in investment banking and broker / dealer activities through its subsidiary Popular Securities. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. TRADING SECURITIES Financial instruments, including, to a limited extent, derivatives such as interest rate futures and options contracts, are utilized by the Corporation in trading activities and are carried at market value. In conjunction with mortgage banking activities, the Corporation records the securitization of mortgage loans held-for-sale as a sale of mortgage loans and the purchase of a mortgage-backed security classified as a trading security. Realized and unrealized changes in market values are recorded separately in the trading profit or loss account in the period in which the changes occur. Interest revenue and expense arising from trading instruments are included in the income statement as part of net interest income rather than in the trading profit or loss account. Securities sold but not yet purchased, which represent the Corporation's obligation to deliver securities sold which were not owned at the time of sale, are recorded at market value. INVESTMENT SECURITIES The investment securities are classified in three categories and accounted for as follows: - - Debt securities that the enterprise has the positive intent and ability to hold to maturity are classified as securities held-to-maturity and reported at amortized cost. The Corporation may not sell or transfer held-to-maturity securities without calling into question its intent to hold other debt securities to maturity, unless a non-recurring or unusual event that could not have been reasonably anticipated has occurred. - - Debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings. - - Debt and equity securities not classified as either securities held-to-maturity or trading securities are classified as securities available-for-sale and reported at fair value, with unrealized gains and losses excluded from earnings and reported net of deferred taxes in a separate component of stockholders' equity. The amortization of premiums is deducted and the accretion of discounts is added to interest income based on the interest method over the outstanding period of the related securities. Net realized gains or losses on sales of investment securities and F-43 96 unrealized loss valuation adjustments considered other than temporary, if any, on securities available-for-sale and held-to maturity are reported separately in the statement of income. The Corporation anticipates prepayments of principal in the calculation of the effective yield and average maturity for collateralized mortgage obligations and mortgage-backed securities. RISK MANAGEMENT INSTRUMENTS The Corporation occasionally uses derivative financial instruments, such as interest rate caps and swaps, in the management of its interest rate exposure. These instruments are accounted for primarily on an accrual basis. Under the accrual method, interest income or expense on the derivative contract is accrued and there is no recognition of unrealized gains and losses on the derivative in the balance sheet. Premiums on option contracts are amortized to interest income or interest expense over the life of such contracts. Income and expenses arising from the instruments are recorded in the category appropriate to the related asset or liability. Gains and losses related to contracts that are effective hedges are deferred and recognized in income in the same period as gains and losses on the hedged item. Gains and losses on early termination of contracts that modify the characteristics of specified assets or liabilities are deferred and amortized as an adjustment to the yield of the related assets or liabilities over their remaining lives. LOANS HELD-FOR-SALE Loans held-for-sale are stated at the lower of cost or market, cost being determined based on the outstanding loan balance less unearned income, and fair market value determined on an aggregate basis according to secondary market prices. The amount by which cost exceeds market value, if any, is accounted for as a valuation allowance with changes included in the determination of net income for the period in which the change occurs. LOANS Loans are stated at the outstanding balance less unearned income and allowance for loan losses. Loan origination fees and costs incurred in the origination of new loans are deferred and amortized using the interest method over the life of the loan as an adjustment to interest yield. Unearned interest on lease financing and installment loans is recognized as income on a basis which results in approximate level rates of return over the term of the loans. Recognition of interest income on commercial and construction loans is discontinued when loans are 60 days or more in arrears on payments of principal or interest or when other factors indicate that collection of principal and interest is doubtful. Interest accrual for lease financing, conventional mortgage loans and close-end consumer loans is ceased when loans are 90 days or more past due. Loans designated as non-accruing are not returned to an accrual status until interest is received on a current basis and those factors indicative of doubtful collection cease to exist. Close-end consumer loans and leases are charged-off against the allowance for loan losses after becoming 120 days past due. Open-end (revolving credit) consumer loans are charged-off after becoming 180 days past due. Income is generally recognized on open-end loans until the loans are charged-off. LEASE FINANCING The Corporation leases passenger and commercial vehicles and equipment to individual and corporate customers. The finance method of accounting is used to recognize revenue on lease contracts that meet the criteria specified in SFAS 13, "Accounting for Leases", as amended. Aggregate rentals due over the term of the leases less unearned income are included in finance lease contracts receivable. Unearned income is amortized using a method which results in approximate level rates of return on the principal amounts outstanding. Finance lease origination fees and costs are deferred and amortized over the average life of the portfolio as an adjustment to the yield. All other leases are accounted for under the operating method. Under this method, revenue is recognized as it becomes due under the terms of the agreement. ALLOWANCE FOR LOAN LOSSES The Corporation follows a systematic methodology to establish and evaluate the adequacy of the allowance for loan losses to provide for inherent losses in the loan portfolio as well as in other credit-related balance sheet and off-balance sheet financial instruments. This methodology includes the consideration of factors such as economic conditions, portfolio risk characteristics, prior loss experience, results of periodic credit reviews of individual loans and financial accounting standards. F-44 97 The provision for loan losses charged to current operations is based on an evaluation of the risk characteristics of the loan portfolio and the economic conditions. Loan losses are charged and recoveries are credited to the allowance for loan losses. The Corporation has defined impaired loans as all loans with interest and/or principal past due 90 days or more and other specific loans for which, based on current information and events, it is probable that the debtor will be unable to pay all amounts due according to the contractual terms of the loan agreement. Loan impairment is measured based on the present value of expected future cash flows discounted at the loan's effective rate, on the observable market price or, on the fair value of the collateral if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment based on past experience. All other loans are evaluated on a loan-by-loan basis. Once a specific measurement methodology is chosen it is consistently applied unless there is a significant change in the financial position of the borrower. Impaired loans for which the discounted cash flows, collateral value or market price equals or exceeds its carrying value do not require an allowance. The allowance for impaired loans is part of the Corporation's overall allowance for loan losses. Cash payments received on impaired loans are recorded in accordance with the contractual terms of the loan. The principal portion of the payment is used to reduce the principal balance of the loan, whereas the interest portion is recognized as interest income. However, when management believes the ultimate collectibility of principal is in doubt, the interest portion is then applied to principal. MORTGAGE BANKING Mortgage loan servicing includes collecting monthly mortgagor payments, forwarding payments and related accounting reports to investors, collecting escrow deposits for the payment of mortgagor property taxes and insurance, and paying taxes and insurance from escrow funds when due. Also, the Corporation is required to foreclose on loans in the event of default by the mortgagor, and to make full payment on foreclosed loans. No asset or liability is recorded by the Corporation for mortgages serviced, except for mortgage servicing rights, advances to investors and escrow balances. Mortgage servicing rights, an intangible asset, represents the cost of acquiring the contractual right to service loans for others. Mortgage loan servicing fees, which are based on a percentage of the principal balances of the mortgages serviced, are credited to income as mortgage payments are collected. On January 1, 1996, the Corporation adopted SFAS 122, "Accounting for Mortgage Servicing Rights." This statement was superseded by SFAS 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities" adopted by the Corporation in January 1997. This statement requires that mortgage banking enterprises recognize as separate assets the rights to service mortgage loans for others, whether those servicing rights are originated or purchased. The total cost of mortgage loans to be sold with servicing rights retained is allocated to the mortgage servicing rights and the loans (without the mortgage servicing rights), based on their relative fair values. Mortgage servicing rights are amortized in proportion to and over the period of estimated net servicing income. In addition, it requires mortgage banking enterprises to assess capitalized mortgage servicing rights for impairment based on the fair value of those rights. To estimate the fair value of mortgage servicing rights the Corporation considers prices for similar assets and the present value of expected future cash flows associated with the servicing rights calculated using assumptions that market participants would use in estimating future servicing income and expense. For purposes of evaluating and measuring impairment of capitalized mortgage servicing rights, the Corporation stratifies such rights based on predominant risk characteristics of underlying loans, such as loan type, rate and term. The amount of impairment recognized, if any, is the amount by which the capitalized mortgage servicing rights per stratum exceed its estimated fair value. Impairment is recognized through a valuation allowance. Total loans serviced were $5,400,000,000 at December 31, 1997 (1996 - $5,110,000,000). The carrying value, estimated fair value and valuation allowance of capitalized mortgage servicing rights were $29,772,000, $36,259,000, and $14,000, respectively, at December 31, 1997. PREMISES AND EQUIPMENT Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed on a straight-line basis over the estimated useful life of each type of asset. Amortization of leasehold improvements is computed over the terms of the respective leases or the estimated useful lives of the improvements, whichever is shorter. Costs of maintenance and repairs which do not improve or extend the life of the respective assets are expensed as incurred. Costs of renewals and betterments are capitalized. When assets are disposed of, their cost and related accumulated depreciation are removed from the accounts and any gain or loss is reflected in the operations as realized or incurred, respectively. F-45 98 On January 1, 1996, the Corporation adopted SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This statement requires that long-lived assets, certain identifiable intangibles and goodwill related to those assets to be held and used, and long-lived assets to be disposed of by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. This statement excludes financial instruments, long-term customer relationships of financial institutions, mortgage and other servicing rights and deferred tax assets. For the year ended December 31, 1997, the Corporation recorded an impairment loss of $3,295,000 (1996- $700,000), as further explained in Note 8, based on the provisions of this pronouncement. OTHER REAL ESTATE Other real estate comprises properties acquired through foreclosure. Upon foreclosure, the recorded amount of the loan is written-down, if required, to the appraised value less estimated costs of disposal of the real estate acquired by charging the allowance for loan losses. Subsequent to foreclosure, the properties are carried at the lower of carrying value or fair value less estimated costs of disposal. Gains or losses on the sale of these properties are credited or charged to expense of operating other real estate. The cost of maintaining and operating such properties is expensed as incurred. INTANGIBLE ASSETS Intangible assets consist of goodwill and other identifiable intangible assets acquired, mainly core deposits and mortgage servicing rights. The values of core deposits, assembled work force and credit customer relationships are amortized using various methods over the periods benefited, which range from 4 to 10 years. Goodwill represents the excess of the Corporation's cost of purchased operations over the fair value of the net assets acquired and is amortized on the straight-line basis over periods ranging from 7 to 15 years. SECURITIES SOLD/PURCHASED UNDER AGREEMENTS TO REPURCHASE/RESALE Repurchase and resale agreements are treated as financing transactions and are carried at the amounts at which the securities will be reacquired or resold as specified in the respective agreements. It is the Corporation's policy to take possession or control of securities purchased under resale agreements. The Corporation monitors the market value of the underlying securities as compared to the related receivable, including accrued interest, and requests additional collateral where deemed appropriate. INCOME TAXES The Corporation uses an asset and liability approach to the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Corporation's financial statements or tax returns. Deferred income tax assets and liabilities are determined for differences between financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future. The computation is based on enacted tax laws and rates applicable to periods in which the temporary differences are expected to be recovered or settled. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. EMPLOYEES' RETIREMENT PLANS The Corporation has trusteed, non-contributory retirement and other benefit plans covering substantially all full-time employees. Pension costs are computed on the basis of accepted actuarial methods and are charged to current operations. Net pension costs are based on various actuarial assumptions regarding future experience under the plan, which include costs for services rendered during the period, interest costs and return on plan assets, as well as deferral and amortization of certain items such as actuarial gains or losses. The funding policy is to contribute funds to the plan as necessary to provide for services to date and for those expected to be earned in the future. To the extent that these requirements are fully covered by assets in the plan, a contribution may not be made in a particular year. OTHER POSTRETIREMENT BENEFIT PLANS The Corporation provides certain health and life insurance benefits for eligible retirees and their dependents. The cost of postretirement benefits, which is determined based on actuarial assumptions and estimates of the costs of providing these benefits in the future, is accrued during the years that the employee renders the required service. F-46 99 STOCK COMPENSATION On January 1, 1996, the Corporation adopted SFAS 123, "Accounting for Stock-Based Compensation." SFAS 123 establishes a fair value-based method of accounting for stock-based compensation plans. It encourages entities to adopt this method in lieu of the provisions of Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees", for all arrangements under which employees receive shares of stock or other equity instruments of the employer or the employer incurs liabilities to employees in amounts based on the price of its stock. BPPR provides a stock-based compensation plan for its Senior Management. It is a three-year incentive plan under which shares of stock of the Corporation are granted if long-term corporate performance and objectives are met. For the year ended December 31, 1997, the Corporation recognized an expense of $1,493,000 (1996- $837,000) related to this plan, determined on the estimated fair value of the stock. TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENT OF LIABILITIES In January 1997, the Corporation adopted, SFAS 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities," as amended by SFAS 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125." This statement provides accounting and reporting standards for transfers and servicing of financial assets and extinguishment of liabilities. These standards are based on a consistent application of a financial components approach that focuses on control. Under that approach, after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. Certain provisions related with repurchase agreements, dollar-roll, securities lending, and similar transactions shall be effective for transfers of financial assets occurring after December 31, 1997. The adoption of this statements did not have a material effect on the consolidated financial statements of the Corporation. DISCLOSURE OF INFORMATION ABOUT CAPITAL STRUCTURE In February 1997, the Financial Accounting Standards Board (FASB) issued SFAS 129, "Disclosure of Information about Capital Structure." This statement established standards for disclosing information about an entity's capital structure and is effective for financial statements for periods ending after December 15, 1997. However, it contains no change in disclosure requirements for entities that were previously subject to the requirements of APB Opinions 10 and 15 and SFAS 47. EARNINGS PER COMMON SHARE Earnings per common share are computed by dividing net income, reduced by dividends on preferred stock, by the weighted average number of common shares of the Corporation outstanding during the year. Effective in 1997, the Corporation adopted SFAS 128, "Earnings per Share." This statement establishes standards for computing and presenting earnings per share (EPS) and applies to entities with publicly held common stock or potential common stock. It simplifies the standards for computing earnings per share previously found in APB Opinion 15, "Earnings per Share," and makes them comparable to international EPS standards. SFAS 128 replaces the presentation of primary earnings per share with a presentation of basic EPS. It also requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. STATEMENT OF CASH FLOWS For purposes of reporting cash flows, cash and cash equivalents include cash on hand and amounts due from banks. RECLASSIFICATION Certain minor reclassifications have been made to the 1996 and 1995 consolidated financial statements to conform with the 1997 presentation. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income." This statement establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains, and losses) in a full set of gen- F-47 100 eral-purpose financial statements. Comprehensive income has been defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances, except those resulting from investments by owners and distributions to owners. This pronouncement requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. The pronouncement does not require a specific format for the financial statement but requires that an enterprise display an amount representing total comprehensive income for the period in that financial statement. This statement is effective for fiscal years beginning after December 15, 1997, and reclassification of financial statements for earlier periods provided for comparative purposes is required. This statement affects only financial statement presentation. Also in June 1997, the FASB issued SFAS 131, "Disclosures about Segments of an Enterprise and Related Information." This statement establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. This statement supersedes SFAS 14, "Financial Reporting for Segments of a Business Enterprise," but retains the requirements to report information about major customers. This statement is effective for financial statements for periods beginning after December 15, 1997, and requires comparative information for earlier years. This statement affects only financial statement presentation and, therefore, management understands that its adoption will not have a material effect, if any, on the Corporation's financial position or results of operations. NOTE 2 - CASH AND DUE FROM BANKS: The Corporation's subsidiary banks are required by regulatory agencies to maintain average reserve balances. The amount of those average reserve balances was approximately $375,820,000 at December 31, 1997 (1996 - $335,676,000). NOTE 3 - INVESTMENT SECURITIES AVAILABLE-FOR-SALE: The amortized cost, gross unrealized gains and losses, approximate market value (or fair value for certain investment securities where no market quotations are available), weighted average yield and maturities of investment securities available-for-sale as of December 31, 1997 and 1996 (1995 - only market value is presented) were as follows: F-48 101
1997 ------------------------------------------------------------ Weighted Amortized Unrealized Unrealized Market average cost gains losses value yield ------------------------------------------------------------ (In thousands) U.S. Treasury securities (average maturity of 1 year and 11 months): Within 1 year.................................................. $ 361,577 $ 938 $ 13 $ 362,502 6.21% After 1 to 5 years............................................. 2,746,232 19,625 3 2,765,854 6.11 ------------------------------------------------------------ 3,107,809 20,563 16 3,128,356 6.12 ------------------------------------------------------------ Obligations of other U.S. Government agencies and corporations (average maturity of 4 years and 6 months): Within 1 year.................................................. 199,100 50 169 198,981 5.73 After 1 to 5 years............................................. 306,661 1,108 124 307,645 6.27 After 5 to 10 years............................................ 301,062 790 1,988 299,864 6.82 ------------------------------------------------------------ 806,823 1,948 2,281 806,490 6.34 ------------------------------------------------------------ Obligations of Puerto Rico, States and political sub- divisions (average maturity of 3 years and 7 months): Within 1 year.................................................. 9,820 33 30 9,823 5.22 After 1 to 5 years............................................. 7,437 150 31 7,556 5.71 After 5 to 10 years............................................ 17,944 266 18,210 6.29 After 10 years................................................. 25,437 208 96 25,549 6.32 ------------------------------------------------------------ 60,638 657 157 61,138 6.06 ------------------------------------------------------------ Collateralized mortgage obligations (average maturity of 2 years and 4 months): Within 1 year.................................................. 230,192 121 137 230,176 6.43 After 1 to 5 years............................................. 510,313 293 246 510,360 6.44 After 5 to 10 years............................................ 44,424 47 32 44,439 6.43 After 10 years................................................. 15,231 1 9 15,223 6.49 ------------------------------------------------------------ 800,160 462 424 800,198 6.44 ------------------------------------------------------------ Mortgage-backed securities (average maturity of 24 years and 8 months): Within 1 year................................................. 82,330 546 135 82,741 5.92 After 1 to 5 years............................................ 14,625 219 40 14,804 6.34 After 5 to 10 years........................................... 16,360 408 14 16,754 6.96 After 10 years................................................ 280,051 5,482 61 285,472 6.78 ------------------------------------------------------------ 393,366 6,655 250 399,771 6.59 ------------------------------------------------------------ Equity securities (without contractual maturity)................. 21,844 17,352 39,196 3.67 ------------------------------------------------------------ Other (average maturity of 11 years and 5 months): After 5 to 10 years........................................... 2,889 2 2,887 6.50 After 10 years................................................ 950 19 969 6.26 ------------------------------------------------------------ 3,839 19 2 3,856 6.44 ------------------------------------------------------------ $ 5,194,479 $47,656 $ 3,130 $5,239,005 6.23% ============================================================
F-49 102
1996 1995 ------------------------------------------------------------------- Weighted Amortized Unrealized Unrealized Market average Market costs gains losses value yield Value -------------------------------------------------------------------- (In thousands) U.S. Treasury securities (average maturity of 1 year and 3 months): Within 1 year........................................ $ 900,463 $ 2,325 $ 59 $ 902,729 5.88% $1,405,122 After 1 to 5 years................................... 1,335,189 5,492 1,905 1,338,776 6.00 1,048,959 -------------------------------------------------------------------- 2,235,652 7,817 1,964 2,241,505 5.96 2,454,081 -------------------------------------------------------------------- Obligations of other U.S. Government agencies and corporations (average maturity of 5 years and 8 months): Within 1 year...................................... 75,256 120 46 75,330 6.39 62,677 After 1 to 5 years................................. 73,064 197 460 72,801 5.77 233,146 After 5 to 10 years................................ 155,231 113 155,344 6.84 1,232 -------------------------------------------------------------------- 303,551 430 506 303,475 6.47 297,055 -------------------------------------------------------------------- Obligations of Puerto Rico, States and political sub- divisions (average maturity of 4 years and 6 months): Within 1 year...................................... 6,832 6 8 6,830 4.64 7,078 After 1 to 5 years................................. 14,510 198 76 14,632 5.12 16,305 After 5 to 10 years................................ 12,695 93 90 12,698 5.36 4,166 After 10 years..................................... 671 9 662 5.34 -------------------------------------------------------------------- 34,708 297 183 34,822 5.12 27,549 -------------------------------------------------------------------- Collateralized mortgage obligations (average maturity of 1 year and 10 months): Within 1 year...................................... 101,158 16 182 100,992 6.02 35,393 After 1 to 5 years................................. 304,987 37 645 304,379 6.11 74,518 After 5 to 10 years................................ 26,125 5 4 26,126 6.07 2,339 After 10 years..................................... 4,593 4,593 6.43 5,088 -------------------------------------------------------------------- 436,863 58 831 436,090 6.09 117,338 -------------------------------------------------------------------- Mortgage-backed securities (average maturity of 21 years and 7 months): Within 1 year..................................... 7,391 1 223 7,169 5.59 11,592 After 1 to 5 years................................ 43,695 21 1,017 42,699 5.75 49,845 After 5 to 10 years............................... 7,482 3 318 7,167 6.98 7,356 After 10 years.................................... 312,901 247 1,064 312,084 6.63 199,187 -------------------------------------------------------------------- 371,469 272 2,622 369,119 6.51 267,980 -------------------------------------------------------------------- Equity securities (without contractual maturity) 12,145 499 12,644 0.86 27,918 -------------------------------------------------------------------- Other (average maturity of 13 years and 2 months): Within 1 year..................................... 203 1 204 8.19 After 5 to 10 years............................... 10,103 2 10,105 8.24 10,000 After 10 years.................................... 8,050 80 7,970 6.90 8,053 -------------------------------------------------------------------- 18,356 3 80 18,279 7.65 18,053 -------------------------------------------------------------------- $3,412,744 $ 9,376 $ 6,186 $3,415,934 6.06% $3,209,974 ====================================================================
The weighted average yield on investment securities available-for-sale is based on amortized cost, therefore it does not give effect to changes in fair value. The aggregate amortized cost and approximate market value of investment securities available-for-sale at December 31, 1997, by contractual or estimated maturity, are shown below:
Amortized cost Market value -------------------------------- (In thousands) Within 1 year........................ $ 883,019 $ 884,223 After 1 to 5 years................... 3,585,268 3,606,219 After 5 to 10 years.................. 382,679 382,154 After 10 years....................... 321,669 327,213 -------------------------------- Total ..................... 5,172,635 5,199,809 Without contractual maturity......... 21,844 39,196 -------------------------------- Total investment securities available-for-sale................ $ 5,194,479 $5,239,005 ================================
F-50 103 Proceeds from the sale of investment securities available-for-sale during 1997 were $5,212,194,000 (1996 - $2,896,060,000; 1995 - $286,045,000). Gross realized gains and losses on those sales during the year were $6,266,000 and $3,998,000 respectively (1996 - $8,504,000 and $5,440,000; 1995 - $6,284,000 and $916,000). The basis on which cost was determined in computing the realized gains and losses was the specific identification method. NOTE 4 - INVESTMENT SECURITIES HELD-TO-MATURITY: The amortized cost, gross unrealized gains and losses, approximate market value (or fair value for certain investment securities where no market quotations are available), weighted average yield and maturities of investment securities held-to-maturity as of December 31, 1997 and 1996 (1995 - only amortized cost is presented) were as follows:
1997 -------------------------------------------------------- Weighted Amortized Unrealized Unrealized Market average cost gains losses value yield -------------------------------------------------------- (In thousands) Obligations of other U.S. Government agencies and corporations (average maturity of 2 months): Within 1 year ......................................... $ 156,422 $ 6 $ 100 $156,328 5.49% -------------------------------------------------------- Obligations of Puerto Rico, States and political subdivisions (average maturity of 6 years and 9 months): Within 1 year ........................................... 8,455 34 16 8,473 7.39 After 1 to 5 years ...................................... 17,726 199 6 17,919 7.36 After 5 to 10 years ..................................... 11,465 761 47 12,179 8.16 After 10 years .......................................... 15,280 199 15,479 8.93 -------------------------------------------------------- 52,926 1,193 69 54,050 7.99 -------------------------------------------------------- Collateralized mortgage obligations (average maturity of 1 year and 11 months): Within 1 year ........................................... 26,031 5 98 25,938 6.04 After 1 to 5 years ...................................... 34,956 69 80 34,945 6.57 After 5 to 10 years ..................................... 2,691 11 2 2,700 6.61 -------------------------------------------------------- 63,678 85 180 63,583 6.36 -------------------------------------------------------- Mortgage-backed securities (average maturity of 3 years and 7 months): Within 1 year ........................................... 8,586 69 87 8,568 7.44 After 1 to 5 years ...................................... 23,252 193 237 23,208 7.44 After 5 to 10 years ..................................... 12,635 112 127 12,620 7.43 After 10 years .......................................... 1,522 22 1,500 6.70 -------------------------------------------------------- 45,995 374 473 45,896 7.41 -------------------------------------------------------- Equity securities (without contractual maturity) ............................................... 70,771 70,771 5.23 -------------------------------------------------------- Other (average maturity of 6 years and 4 months): Within 1 year ........................................... 3,150 3,150 5.96 After 1 to 5 years ...................................... 5,645 4 5,649 2.34 After 5 to 10 years ..................................... 4,229 4,229 8.24 After 10 years .......................................... 6,177 35 6,142 8.01 -------------------------------------------------------- 19,201 4 35 19,170 6.06 -------------------------------------------------------- $ 408,993 $ 1,662 $ 857 $409,798 6.15% ========================================================
F-51 104
1996 1995 ------------------------------------------------------------------------ Weighted Amortized Unrealized Unrealized Market average Amortized cost gains losses value yield cost ------------------------------------------------------------------------ (In thousands) U.S. Treasury securities (average maturity of 6 months): Within 1 year..................................... $ 618,934 $ 590 $ 183 $ 619,341 5.83% $ 301,463 ------------------------------------------------------------------------ After 1 to 5 years................................ 623,703 ------------------------------------------------------------------------ 618,934 590 183 619,341 5.83 925,166 ------------------------------------------------------------------------ Obligations of other U.S. Government agencies and corporations (average maturity of 5 months): Within 1 year..................................... 119,701 107 119,594 6.17 After 1 to 5 years................................ 20,000 525 19,475 3.50 122,978 ------------------------------------------------------------------------ 139,701 632 139,069 5.78 122,978 ------------------------------------------------------------------------ Obligations of Puerto Rico, States and political subdivisions (average maturity of 2 years and 11 months): Within 1 year..................................... 98,073 52 56 98,069 3.32 125,983 After 1 to 5 years................................ 23,993 704 63 24,634 7.33 34,578 After 5 to 10 years............................... 11,839 624 12,463 8.14 12,179 After 10 years.................................... 17,397 447 17,844 8.95 22,455 ------------------------------------------------------------------------ 151,302 1,827 119 153,010 4.98 195,195 ------------------------------------------------------------------------ Collateralized mortgage obligations (average maturity of 1 year and 6 months): Within 1 year..................................... 93,077 37 522 92,592 5.43 150,960 After 1 to 5 years................................ 59,607 259 364 59,502 6.13 120,345 After 5 to 10 years............................... 4,582 15 8 4,589 6.24 14,058 After 10 years.................................... 109 ------------------------------------------------------------------------ 157,266 311 894 156,683 5.72 285,472 ------------------------------------------------------------------------ Mortgage-backed securities (average maturity of 4 years and 3 months): Within 1 year..................................... 9,181 1 37 9,145 7.53 11,694 After 1 to 5 years................................ 27,813 3 114 27,702 7.52 32,965 After 5 to 10 years............................... 16,004 2 71 15,935 7.51 17,877 After 10 years.................................... 2,730 74 2,656 7.17 4,111 ----------------------------------------------------------------------- 55,728 6 296 55,438 7.50 66,647 ----------------------------------------------------------------------- Equity securities (without contractual maturity) 61,407 61,407 6.06 43,558 ----------------------------------------------------------------------- Other (average maturity of 5 years and 9 months): Within 1 year.................................... 250 250 7.50 After 1 to 5 years............................... 6,145 5 6,150 2.78 6,145 After 5 to 10 years.............................. 4,197 4,197 7.82 4,027 After 10 years................................... 2,136 40 2,096 5.31 2,156 ------------------------------------------------------------------------ 12,728 5 40 12,693 4.97 12,328 ------------------------------------------------------------------------ $1,197,066 $ 2,739 $ 2,164 $ 1,197,641 5.78% $1,651,344 ========================================================================
The aggregate amortized cost and approximate market value of investment securities held-to-maturity at December 31, 1997, by contractual or estimated maturity, are shown below:
Amortized cost Market value --------------------------------- (In thousands) Within 1 year........................ $202,644 $202,457 After 1 to 5 years................... 81,579 81,721 After 5 to 10 years.................. 31,020 31,728 After 10 years....................... 22,979 23,121 ------------------------------- Total ..................... 338,222 339,027 Without contractual maturity......... 70,771 70,771 ------------------------------- Total investment securities held-to-maturity................... $408,993 $409,798 ================================
F-52 105 During 1996, investment securities held-to-maturity with an amortized cost of $2,622,000 were called by the issuer. Proceeds from the sale of those securities were $2,652,000. Gross realized gain on this transaction was $30,000. Investments in obligations that are payable from and secured by the same source of revenue or taxing authority, other than the U.S. government, and that exceeded 10 percent of stockholders' equity were as follows:
Percent of Amortized stockholders' Market cost equity value ------------------------------------ (Dollars in thousands) Issuer: Government of Puerto Rico, its agencies and instrumentalities: December 31, 1996................... $151,203 12% $152,933
NOTE 5 - PLEDGED ASSETS: At December 31, 1997, investment securities and loans amounting to $4,067,567,000 (1996 - $2,788,401,000; 1995 - $2,920,220,000) are pledged to secure public and trust deposits and securities and mortgages sold under agreements to repurchase. NOTE 6 - LOANS AND ALLOWANCE FOR LOAN LOSSES: The composition of the loan portfolio at December 31, was as follows:
1997 1996 ---------------------------- (In thousands) Loans secured by real estate: Insured or guaranteed by the U.S. Government or its agencies ........................................ $ 79,673 $ 83,864 Guaranteed by the Commonwealth of Puerto Rico ............ 63,035 67,497 Commercial loans secured by real estate .................. 1,109,213 1,030,383 Residential conventional mortgages ....................... 2,432,183 2,295,723 Construction and land development ........................ 190,509 181,433 Consumer ................................................. 605,204 536,527 ---------------------------- 4,479,817 4,195,427 Financial institutions .................................... 53,145 90,345 Commercial, industrial and agricultural ................... 3,245,706 2,390,267 Lease financing ........................................... 722,031 639,945 Consumer for household, credit cards and other consumer expenditures ............................ 2,700,661 2,344,001 Other ..................................................... 256,315 194,926 ---------------------------- $ 11,457,675 $ 9,854,911 ============================
As of December 31, 1997, loans on which the accrual of interest income had been discontinued amounted to $194,442,000 (1996 - $145,408,000; 1995 - $144,482,000). If these loans had been accruing interest, the additional interest income realized would have been approximately $11,868,000 (1996 - $7,696,000; 1995 - $7,135,000). In addition, there is $6,000 of renegotiated loans still accruing interest at December 31, 1997 (1996 - $3,308,000; 1995 - $2,742,000). Included in the non-accruing loans as of December 31, 1997 was $30,840,000 (1996 - $16,320,000; 1995 - $14,827,000) in consumer loans. F-53 106 At December 31, the recorded investment in loans that were considered impaired and the related disclosures are shown below:
December 31, --------------------------- 1997 1996 (In thousands) Impaired loans with a related allowance ........................... $ 82,338 $ 59,447 Impaired loans that do not require allowance ...................... 37,313 36,700 --------------------------- Total impaired loans ........................................ $ 119,651 $ 96,147 ============================ Allowance for impaired loans ...................................... $ 18,808 $ 17,777 ============================ Impaired loans measured based on fair value of collateral ......... $ 39,636 $ 36,700 Impaired loans measured based on discounted cash flows ............ 80,015 59,447 --------------------------- $ 119,651 $ 96,147 ============================ Average balance of impaired loans during the year ................. $ 113,208 $ 88,165 ============================ Interest income recognized on impaired loans during the year ...... $ 6,327 $ 3,526 ============================
The changes in the allowance for loan losses for the year ended December 31, were as follows:
1997 1996 1995 ---------------------------------------- (In thousands) Balance at beginning of year ................ $ 185,574 $ 168,393 $ 153,798 Reserves acquired ........................... 13,237 402 Provision for loan losses ................... 110,607 88,839 64,558 Recoveries .................................. 49,823 35,901 28,744 Loans charged-off ........................... (147,590) (107,961) (78,707) ---------------------------------------- Balance at end of year ...................... $ 211,651 $ 185,574 $ 168,393 ========================================
The components of the net financing leases receivable at December 31, were:
1997 1996 ------------------------------ (In thousands) Total minimum lease payments.................................... $564,981 $495,820 Estimated residual value of leased property .................... 154,034 141,561 Deferred origination costs .................................... 3,016 2,564 Less - Unearned financing income .......................... (140,104) (123,944) ------------------------------ Net minimum lease payments ..................................... 581,927 516,001 Less - Allowance for loan losses ........................ (5,869) (3,415) ------------------------------ $576,058 $512,586 ==============================
Estimated residual value is generally established at amounts expected to be sufficient to cover the Corporation's investment. At December 31, 1997, future minimum lease payments are expected to be received as follows:
(In thousands) -------------- 1998 ........................... $200,841 1999 ........................... 152,963 2000 ........................... 110,537 2001 ............................ 70,168 2002 and thereafter ............ 30,472 -------- $564,981 ========
F-54 107 NOTE 7 - Related party transactions: The Corporation grants loans to its directors, executive officers and to certain related individuals or organizations in the ordinary course of business. The movement and balance of these loans were as follows:
Officers Directors Total -------------------------------------- (In thousands) Balance at January 1, 1996..... $ 2,347 $ 144,348 $ 146,695 New loans...................... 839 184,384 185,223 Payments....................... (211) (200,345) (200,556) -------------------------------------- Balance at December 31, 1996... 2,975 128,387 131,362 New loans...................... 291 117,762 118,053 Payments....................... (661) (137,539) (138,200) -------------------------------------- Balance at December 31, 1997... $ 2,605 $ 108,610 $ 111,215 ======================================
These loans have been consummated on terms no more favorable than those that would have been obtained if the transaction had been with unrelated parties. NOTE 8 - PREMISES AND EQUIPMENT: Premises and equipment are stated at cost less accumulated depreciation and amortization as follows:
Useful life in years 1997 1996 ----------------------------------------- (In thousands) Land............................................... $ 51,286 $ 47,315 ------------------------- Buildings.......................................... 15-50 188,833 208,317 Equipment.......................................... 3-10 336,826 280,945 Leasehold improvements............................. Various 55,837 53,169 ------------------------- 581,496 542,431 Less - Accumulated depreciation and amortization... 297,244 252,393 ------------------------- 284,252 290,038 ------------------------- Construction in progress........................... 29,354 19,344 ------------------------- $364,892 $356,697 =========================
Depreciation and amortization of premises and equipment for the year was $54,523,000 (1996- $48,481,000; 1995 - $44,448,000) of which $10,341,000 (1996 - $9,943,000; 1995 - $9,261,000) was charged to occupancy expense and $44,182,000 (1996 - $38,538,000; 1995 - $35,187,000) was charged to equipment, communications and other operating expenses. Occupancy expense is net of rental income of $16,442,000 (1996 - $16,193,000; 1995 - $15,384,000). In accordance with SFAS 121, during 1997, the Corporation recorded an impairment loss on a building, which was sold later in the year, of approximately $3,295,000 (1996- $700,000), based on an appraisal value, which was included in other operating income. F-55 108 NOTE 9- DEPOSITS: Total interest bearing deposits as of December 31, consisted of:
1997 1996 --------------------------- (In thousands) Savings deposits: Savings accounts ......................................... $ 3,584,963 $ 3,201,367 NOW and money market accounts ............................ 1,357,519 1,173,496 --------------------------- 4,942,482 4,374,863 --------------------------- Certificates of deposit: Under $100,000 ........................................... 2,246,988 1,884,135 $100,000 and over ........................................ 2,013,280 2,173,573 --------------------------- 4,260,268 4,057,708 --------------------------- $ 9,202,750 $ 8,432,571 ===========================
NOTE 10 - FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE: The following table summarizes certain information on federal funds purchased and securities sold under agreements to repurchase as of December 31:
1997 1996 1995 ---------------------------------------- (Dollars in thousands) Federal funds purchased .......................... $ 389,040 $ 158,336 $ 307,506 Securities sold under agreements to repurchase ... 2,334,289 1,717,129 2,693,372 ---------------------------------------- Total amount outstanding ......................... $2,723,329 $1,875,465 $3,000,878 ======================================== Maximum aggregate balance outstanding at any month-end ................................ $3,897,110 $2,922,611 $3,000,878 ======================================== Average daily aggregate balance outstanding ...... $2,836,290 $2,521,929 $2,016,273 ======================================== Weighted average interest rate: For the year ................... 5.01% 5.12% 5.43% At December 31.................. 5.51 5.16 5.61
F-56 109 NOTE 11 - OTHER SHORT-TERM BORROWINGS: Other short-term borrowings as of December 31, consisted of:
1997 1996 ------------------------ (In thousands) Advances under revolving lines of credit amounting to $605,000,000 (1996 - $240,000,000) with fixed interest rates ranging from 5.95% to 6.75% at December 31, 1997 (1996 - 5.55% to 6.88%) .......................................................................... $ 81,700 $ 65,000 Commercial paper with various maturities until June 1998 at rates ranging from 5.70% to 5.99% (1996 - 5.05% to 5.75%) .................................................................... 183,999 290,091 Term notes maturing in 1998, paying interest monthly at LIBOR less 3 basis points with a quarterly reset of interest rate ........................................................................... 25,000 Term notes maturing in 1998, paying interest quarterly at floating interest rates ranging from 0.25% to 0.75% (1996 - 0.25% to 0.50%) over 3-month LIBOR rate (LIBOR rate at December 31, 1997 was 5.81%; 1996 - 5.56%) ......................................................................... 66,488 189,961 Term notes maturing in 1998, paying interest semiannually at rates ranging from 5.40% to 8.12% (1996 - 5.33% to 8.32%) ........................................................... 111,509 136,952 Term funds purchased with maturities until July 1998 at rates ranging from 5.64% to 5.93% (1996 - 5.29% to 5.79%) .......................................................................... 680,000 652,000 Term notes with maturities until December 1998 with fixed rates ranging from 4.40% to 5.87% ........ 138,500 Term notes maturing in 1997, paying interest quarterly at floating interest rates of 0.125% over the 6-month LIBOR rate (LIBOR rate at December 31, 1996 was 5.60%) ................................... 10,000 Securities sold not yet purchased .................................................................. 59,315 Others ............................................................................................. 239 687 ------------------------ $1,287,435 $1,404,006 ========================
The weighted average interest rate of other short-term borrowings at December 31, 1997 was 5.60% (1996 - 5.75%; 1995 - 5.53%). The maximum aggregate balance outstanding at any month-end was approximately $1,985,452,000 (1996 - $1,404,006,000; 1995 - $773,366,000). The average aggregate balance outstanding during the year was approximately $1,609,035,000 (1996 - $883,739,000; 1995 - $529,111,000). The weighted average interest rate during the year was 5.94% (1996 - 6.27%; 1995 - 6.05%). F-57 110 NOTE 12 - NOTES PAYABLE: Notes payable outstanding at December 31, consisted of the following:
1997 1996 ------------------------ (In thousands) Term notes with maturities ranging from 1999 through 2005 paying interest semiannually at fixed rates ranging from 5.50% to 8.41% (1996 - 5.40% to 8.41%) .................................... $904,884 $575,360 Term notes with maturities ranging from 1999 through 2005 paying interest quarterly at rates ranging from 0.10% to 0.46% (1996 - 0.125% to 0.75%) over the 3-month LIBOR rate and 3-month US Treasury Bill rate (LIBOR and US Treasury Bill rates at December 31, 1997 were 5.81% and 5.35%, respectively; 1996 - 5.56% and 5.17%, respectively) .......................................... 194,366 117,356 Term notes maturing in 1999 paying interest monthly at a fixed rate of 5.92% ....................................................... 25,000 25,000 Promissory notes with maturities ranging from 1999 through 2003 with fixed interest rates ranging from 5.50% to 6.35% (1996 - 4.62% to 6.35%) ......................................... 49,200 43,700 Promissory notes with maturities ranging from 2000 through 2005 with floating interest rates ranging from 87% to 92% of the 3-month LIBID rate (LIBID rate at December 31, 1997 was 5.69%; 1996 - 5.44%) ....................................................... 230,000 200,000 Term notes maturing in 1998 paying interest monthly at LIBOR less 3 basis points with a quarterly reset of the interest rate .............................................................. 25,000 Mortgage notes and other debt with fixed rates and terms ......................... 246 297 ------------------------ $1,403,696 $986,713 ========================
NOTE 13 - SENIOR DEBENTURES: Senior debentures at December 31, 1996, consisted of a $30,000,000 obligation issued by the Corporation with interest at a fixed rate of 8.25%, which matured in January 1997. The senior debentures contained various covenants which, among others, restricted the payment of dividends. These debentures prohibited the Corporation from paying dividends or making any other distributions with respect to the Corporation's common stock if such aggregate distribution exceeded $50,000,000 plus 50% of consolidated net income (or minus 100% of consolidated net loss), computed on a cumulative basis from January 1, 1992 to the date of payment of any such dividends or other distributions or if an event of default had occurred. NOTE 14 - SUBORDINATED NOTES: Subordinated notes at December 31, 1997 and 1996, consisted of $125,000,000 notes issued by the Corporation on December 12, 1995, maturing on December 15, 2005, with interest payable semiannually at 6.75%. The notes issued by the Corporation are unsecured obligations which are subordinated in right of payment to the prior payment in full of all present and future senior indebtedness of the Corporation. These notes do not provide for any sinking fund. NOTE 15 - PREFERRED BENEFICIAL INTEREST IN POPULAR NORTH AMERICA'S JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES GUARANTEED BY THE CORPORATION: On February 5, 1997, BanPonce Trust I, a statutory business trust created under the laws of the State of Delaware that is wholly-owned by Popular North America and indirectly wholly-owned by the Corporation, sold to institutional investors $150,000,000 of its 8.327% Capital Securities Series A (liquidation amount $1,000 per Capital Security) through certain underwriters. The proceeds of the issuance, together with the proceeds of the purchase by Popular North America of $4,640,000 of its 8.327% common securities (liquidation amount $1,000 per common security) were used to purchase $154,640,000 aggregate principal amount of Popular North America's 8.327% Junior Subordinated Deferrable Interest Debentures, Series A (the "Junior F-58 111 - -------------------------------------------------------------------------------- Subordinated Debentures"). These capital securities qualify as Tier I capital, are fully and unconditionally guaranteed by the Corporation, and are presented in the Consolidated Statements of Condition as "Guaranteed Preferred Beneficial Interest in Popular North America's Subordinated Debentures." The obligations of Popular North America under the Junior Subordinated Debentures and its guarantees of the obligations of BanPonce Trust I are fully and unconditionally guaranteed by the Corporation. The assets of BanPonce Trust I consisted of $154,640,000 of Junior Subordinated Debentures and a related accrued interest receivable of $4,292,000. The Junior Subordinated Debentures mature on February 1, 2027; however, under certain circumstances, the maturity of the Junior Subordinated Debentures (which shortening would result in a mandatory redemption of the Capital Securities) may be shortened. NOTE 16 - LONG-TERM DEBT MATURITY REQUIREMENTS: The aggregate amounts of maturities of notes payable, capital securities and subordinated notes were as follows:
Notes Capital Subordinated Year payable Securities notes Total ------------------------------------------------------------------------------------- (In thousands) 1998.................... $ 30 $ 30 1999.................... 355,385 355,385 2000.................... 432,342 432,342 2001.................... 203,973 203,973 2002.................... 184,043 184,043 Later years............. 227,923 $150,000 $125,000 502,923 --------------------------------------------------------- Total................... $1,403,696 $150,000 $125,000 $1,678,696 =========================================================
NOTE 17 - PREFERRED STOCK OF BPPR: BPPR has 200,000 shares of authorized preferred stock with a par value of $100. This stock may be issued in series, and the shares of each series shall have such rights and preferences as shall be fixed by the Board of Directors when authorizing the issuance of that particular series. At December 31, 1997, there are no such shares issued or outstanding. NOTE 18 - STOCKHOLDERS' EQUITY: The Corporation has 180,000,000 shares of authorized common stock with par value of $6 per share. At December 31, 1997, there were 67,682,704 (1996 - 66,088,506) shares issued and outstanding. On May 8, 1997, the Board of Directors of the Corporation approved a stock repurchase program which allows the Corporation to repurchase in the open market, at such times and prices as market conditions shall warrant, up to three million shares of its outstanding common stock. As of December 31, 1997, the Corporation had purchased 988,800 shares under this program for a total cost of $39,559,000. On April 26, 1996, the Corporation's Board of Directors authorized a stock split of one share of stock for each share outstanding effected in the form of a dividend, effective July 1, 1996. As a result of the split, 33,000,590 shares were issued and $198,004,000 was transferred from retained earnings to common stock. All per share data included herein have been adjusted to reflect the stock split. The Corporation has a dividend reinvestment plan under which stockholders may reinvest their quarterly dividends in shares of common stock at a 5% discount from the market price at the time of issuance. During 1997, shares totaling 120,726 (1996 - 191,236; 1995 - 221,016), equivalent to $4,642,000 (1996 - $4,135,000; 1995 - $3,500,000) in additional equity, were issued under the plan. The Corporation has 10,000,000 shares of authorized preferred stock with no par value. This stock may be issued in one or more series, and the shares of each series shall have such rights and preferences as shall be fixed by the Board of Directors when authorizing the issuance of that particular series. The Corporation has 4,000,000 shares issued and outstanding of Series A preferred stock. These shares are non-convertible and are redeemable at the option of the Corporation on or after June 30, 1998. The redemption price per share is $26.25 from June 30, 1998 through June 29, 1999, $26.00 from June 30, 1999 through June 29, 2000, $25.75 from June 30, 2000 through June 29, 2001, $25.50 from June 30, 2001 through June 29, 2002 and $25.00 from June 30, 2002 and thereafter. Dividends on the Series A preferred stock are non-cumulative and are payable monthly at the annual rate of 8.35% of the liquidation preference of $25.00 per share. F-59 112 The Corporation's average number of common shares outstanding used in the computation of net income per common share was 67,018,482 (1996 - 66,022,312; 1995 - 65,816,300). During the year, cash dividends of $0.80 (1996 - $0.69 and 1995 - $0.58) per common share outstanding amounting to $53,681,000 (1996 - $45,557,000; 1995 - $37,846,000) were declared. In addition, dividends declared on preferred stock amounted to $8,350,000 (1996 - $8,350,000; 1995 - $8,350,000). Popular International Bank, Inc. and Popular North America, Inc.'s bank subsidiaries (Banco Popular, Illinois, Banco Popular, N.A. (California), Banco Popular, N.A. (Florida), Banco Popular, N.A. (Texas) and Banco Popular, FSB) have certain statutory provisions and regulatory requirements and policies, such as the maintenance of adequate capital, that limit the amount of dividends they can pay. Other than these limitations, no other restrictions exist on the ability of Popular International Bank, Inc. and Popular North America, Inc. to make dividend and asset distributions to the Corporation, nor on the ability of the subsidiaries of Popular North America, Inc., except for Banco Popular, FSB, to make distributions to Popular North America, Inc. In connection with the acquisition by Banco Popular, FSB from the Resolution Trust Company (RTC) of four New Jersey branches of the former Carteret Federal Savings Bank, the RTC provided to Banco Popular, FSB interim financial assistance in the form of a loan in the amount of $20 million, which matures on January 20, 2000, but which is prepayable any time before then. Pursuant to the terms of such financing, Banco Popular, FSB may not, among other things, declare or pay any dividends on its outstanding capital stock (unless such dividends are used exclusively for payment of principal of or interest on such RTC loan) or make any distribution of its assets until payment in full of such promissory note. NOTE 19 - REGULATORY CAPITAL REQUIREMENTS: The Corporation is subject to various regulatory capital requirements imposed by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Corporation's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation must meet specific capital guidelines that involve quantitative measures of the Corporation's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory requirements. The Corporation's capital amounts and classification are also subject to qualitative judgements by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Corporation to maintain minimum amounts and ratios of Tier I and total capital to risk-weighted assets, and of Tier I capital to average assets (leverage ratio) as defined in the regulations. Management has determined that as of December 31, 1997, the Corporation exceeded all capital adequacy requirements to which it is subject. As of December 31, 1997, the Corporation was well capitalized under the regulatory framework for prompt corrective action and there are no conditions or events since that date that management believes have changed the institution's category. The Corporation's actual and required ratios and amounts of total risk-based capital, Tier I risk-based capital and Tier I leverage, as of December 31, were as follows: F-60 113
Regulatory requirements ------------------------------------------ To be well capitalized under prompt For capital corrective action Actual adequacy purposes provisions ---------------------------------------------------------------- Amount Ratio Amount Ratio Amount Ratio ---------------------------------------------------------------- As of December 31, 1997: (In thousands) Total Capital (to Risk-Weighted Assets): Consolidated .......................... $1,598,506 14.56% $878,054 8% $1,097,567 10% BPPR .................................. 1,165,509 12.58 741,226 8 926,533 10 Banco Popular, FSB .................... 131,722 15.11 69,745 8 87,181 10 Tier I Capital (to Risk-Weighted Assets): Consolidated .......................... $1,335,391 12.17% $439,027 4% $ 658,540 6% BPPR .................................. 1,048,899 11.32 370,613 4 555,920 6 Banco Popular, FSB .................... 120,697 13.84 34,872 4 52,309 6 Tier I Capital (to Average Assets): Consolidated .......................... $1,335,391 6.86% $583,831 3% $ 973,052 5% BPPR .................................. 1,048,899 6.36 494,917 3 824,862 5 Banco Popular, FSB .................... 120,697 8.02 45,134 3 75,224 5 Regulatory requirements ------------------------------------------ To be well capitalized under prompt For capital corrective action Actual adequacy purposes provisions ---------------------------------------------------------------- Amount Ratio Amount Ratio Amount Ratio ---------------------------------------------------------------- As of December 31, 1996: (In thousands) Total Capital (to Risk-Weighted Assets): Consolidated .......................... $1,367,478 14.18% $771,505 8% $ 964,382 10% BPPR .................................. 1,017,755 12.57 647,624 8 809,530 10 Banco Popular, FSB .................... 117,989 16.14 58,480 8 73,100 10 Tier I Capital (to Risk-Weighted Assets): Consolidated .......................... $1,121,128 11.63% $385,753 4% $ 578,629 6% BPPR .................................. 915,825 11.31 323,812 4 485,718 6 Banco Popular, FSB .................... 108,751 14.88 29,240 4 43,860 6 Tier I Capital (to Average Assets): Consolidated .......................... $1,121,128 6.71% $501,357 3% $ 835,595 5% BPPR .................................. 915,825 6.65 412,944 3 688,239 5 Banco Popular, FSB .................... 108,751 8.99 36,300 3 60,500 5
F-61 114 NOTE 20 - INTEREST ON INVESTMENTS: Interest on investments consisted of the following:
1997 1996 1995 ------------------------------------ (In thousands) Money market investments: Federal funds sold and securities and mortgages purchased under agreements to resell ..... $ 31,886 $ 45,697 $ 22,823 Time deposits with other banks ........................... 1,799 776 165 Other .................................................... 238 224 89 ------------------------------------ $ 33,923 $ 46,697 $ 23,077 ==================================== Investment securities: U.S. Treasury securities ................................. $ 213,153 $ 189,300 $ 167,657 Obligations of other U.S. Government agencies and corporations ............. 82,205 43,157 35,697 Obligations of Puerto Rico, States and political subdivisions ..................... 8,755 10,902 12,948 Collateralized mortgage obligations ...................... 37,786 26,265 26,435 Mortgage-backed securities ............................... 10,667 6,456 10,892 Other .................................................... 6,170 4,530 6,312 ------------------------------------ $ 358,736 $ 280,610 $ 259,941 ====================================
Interest income on investment securities for the year ended December 31, 1997, includes tax exempt interest of $290,638,000 (1996 - $229,958,000; 1995 - $202,209,000). Exempt interest relates mostly to obligations of the United States and Puerto Rico governments. NOTE 21 - EMPLOYEE BENEFITS: Pension plan: All regular employees of BPPR are covered by a non-contributory defined benefit pension plan. Pension benefits begin to vest after five years of service and are based on age, years of credited service and final average compensation, as defined. At December 31, 1997, plan assets consisted primarily of U.S. Government obligations, high grade corporate bonds and listed stocks, including 2,836,430 shares (1996 - 2,836,430) of the Corporation with a market value of approximately $140,403,000 (1996 - $95,730,000). Dividends paid on shares of the Corporation held by the plan during 1997 amounted to $2,156,000 (1996 - $1,957,000). The following table sets forth the plan's funded status and amounts recognized in the consolidated financial statements at December 31:
1997 1996 --------------------- (In thousands) Actuarial present value of benefit obligations: Vested benefits ......................................... $(204,046) $(172,272) Non-vested benefits ..................................... (42,545) (38,117) --------------------- Accumulated benefit obligation ............................. (246,591) (210,389) Effect of projected future compensation levels ............. (44,467) (32,773) --------------------- Projected benefit obligation ............................... (291,058) (243,162) Plan assets at fair market value ........................... 368,399 293,362 --------------------- Plan assets in excess of projected benefit obligation ...................................... 77,341 50,200 Unrecognized net gain from past experience different from that assumed and effect of changes in assumptions .................... (57,833) (27,101) Unrecognized prior service cost ............................ (2,374) (2,620) Unrecognized initial net assets ............................ (18,086) (20,547) --------------------- Accrued pension cost ....................................... $ (952) $ (68) =====================
F-62 115 Net pension cost for the year ended December 31, included the following components:
1997 1996 1995 ------------------------------------ (In thousands) Service costs - benefits earned during the period ... $ 10,847 $ 9,860 $ 6,791 Interest cost on projected benefit obligation ...... 18,657 16,645 14,798 Actual return on plan assets ........................ (87,267) (68,965) (48,665) Net amortization and deferral ....................... 58,647 46,273 29,257 ------------------------------------ Net pension costs ............................... 884 3,813 2,181 Cost of early retirement window ..................... 3,851 ------------------------------------ Total pension cost .............................. $ 884 $ 3,813 $ 6,032 ====================================
At December 31, 1997, the discount rate used in determining the actuarial present value of the projected benefit obligation was 7.00% (1996 - 7.50%; 1995 - - 7.25%). Rates of future compensation levels reflected a 4% inflation assumption plus a merit component ranging from 0.5% to 4.5% for 1997, 1996 and 1995. The expected long-term rate of return on assets used in the computation was 9% for 1997, 1996 and 1995. In 1995, BPPR implemented a voluntary early retirement plan ("window") for employees meeting certain eligibility requirements. The plan was available from January 1, 1995 until May 1, 1995, and had a total cost of $4,539,000, including pension and postretirement benefit costs. Retirement and savings plan: The Corporation also provides contributory retirement and savings plans pursuant to sections 1165(e) of the Puerto Rico Internal Revenue Code and section 401(k) of the Internal U.S. Revenue Code, as applicable, for substantially all the employees of Popular Securities, Equity One, Banco Popular FSB, Banco Popular N.A. (California), Banco Popular Illinois, Popular Finance, Popular Leasing and Popular Mortgage. Employer contributions are determined based on specific provisions of each plan. The cost of providing this benefit in 1997 was $2,811,000 (1996 - $2,163,000; 1995 - $1,247,000). The Corporation also has a contributory savings plan available to employees of BPPR. Employees are fully vested in the employer's contribution after seven years of service. All contributions are invested in shares of the Corporation. Total savings plan expense was $999,000 in 1997 (1996 - $863,000; 1995 - $621,000). The savings plan held 553,293 (1996 - 368,117; 1995 - 140,970) shares of common stock of the Corporation with a market value of approximately $27,388,000 at December 31, 1997 (1996 - $12,424,000; 1995 - $2,731,000). Postretirement health care benefits: In addition to providing pension benefits, BPPR provides certain health care benefits for retired employees. Substantially all of the employees of BPPR who are eligible to retire under the pension plan, and provided they reach retirement age while working for BPPR, may become eligible for these benefits. The actual disbursement for providing these benefits during 1997 amounted to approximately $2,703,000 (1996 - $2,556,000; 1995 - $2,152,000). The components of net postretirement benefit cost for the year ended December 31, were as follows:
1997 1996 1995 ------------------------------------ (In thousands) Service cost-benefits attributable to service during the period ............................... $ 3,852 $ 3,584 $ 2,658 Interest cost on accumulated postretirement benefit obligation ............................. 5,556 5,719 5,435 Net amortization and deferral ....................... 435 1,230 597 ------------------------------------ Net postretirement benefit cost ................. 9,843 10,533 8,690 Cost of early retirement window ..................... 688 Total postretirement benefit cost ............... $ 9,843 $ 10,533 $ 9,378 ====================================
F-63 116 The status of the Corporation's unfunded postretirement benefit plan at December 31, was as follows:
1997 1996 --------------------- (In thousands) Actuarial present value of expected postretirement benefit obligation: Retirees ................................................... $(27,225) $(26,929) Fully eligible active plan participants .................... (14,318) (12,569) Other active plan participants ............................. (46,433) (44,470) --------------------- Accumulated postretirement benefit obligation .............. (87,976) (83,968) Unrecognized net loss from past experience different from that assumed and effects of changes in assumptions .................................. 12,284 14,981 Unrecognized prior service cost ............................ 4,941 5,376 --------------------- Accrued postretirement benefit cost ........................ $(70,751) $(63,611) =====================
The weighted average discount rate used in determining the accumulated postretirement benefit obligation at December 31, 1997 was 7.00% (1996 - 7.50%). The assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation at December 31, 1996 was 10%, gradually decreasing to 5% by the year 2001 and remaining at that level thereafter. A one-percentage point increase in the health care cost trend rate would increase the accumulated postretirement benefit obligation as of December 31, 1997, by $14,200,000 and the sum of the service and interest cost in 1997 by $1,782,000. Profit sharing plan: BPPR also has a profit sharing plan covering substantially all regular employees. Annual contributions are determined based on the bank's profitability ratios, as defined in the plan, and are deposited in trust. Profit sharing expense for the year, including the cash portion paid annually to employees which represented 40% of the expense for 1997, 1996 and 1995, amounted to $25,954,000 (1996 - $22,859,000; 1995 - $19,577,000). Long-term incentive plan: BPPR has a long-term incentive plan for its senior management. Under this plan, each January 1st the Board of Directors awards senior management a specified number of shares of common stock of the Corporation contingent upon reaching some pre-defined performance measures over periods of three years. The dividends attributable to these shares are also part of the award. The final number of shares awarded is subject to a factor based on the level of attainment. BPPR applied APB Opinion 25 and related Interpretations in accounting for the plans in 1995. Accordingly, compensation expense was recognized based on the prevailing stock price until measurement date. The measurement date is the date when the ultimate number of shares to be granted is known. Under the provisions of SFAS 123, effective in 1996, compensation cost is determined based on the fair value of the stock at the grant date. The compensation expense related to each award is recognized when probable, based on the best estimate of the outcome of the performance condition, on a straight line basis over the vesting period. The compensation cost recognized for the performance-based plan was $1,493,000 in 1997 (1996 - $837,000; 1995 - $284,000). Puerto Rico benefit restoration plan: BPPR also has a non-qualified unfunded supplementary pension and profit sharing plan for those employees whose compensation exceeds the limits established by ERISA. F-64 117 The following table sets forth the amounts recognized in the consolidated financial statements at December 31, for the benefit restoration plan:
1997 1996 ----------------------------- (In thousands) Actuarial present value of benefit obligations: Vested benefits ......................................... $ (490) $ (324) ----------------------------- Accumulated benefit obligation .......................... (490) (324) Effect of projected future compensation levels ............ (3,399) (1,849) ----------------------------- Projected benefit obligation ............................ (3,889) (2,173) Unrecognized net loss from past experience different from that assumed and effect of changes in assumptions .................... 1,847 847 Unrecognized prior service cost ........................... 571 624 ----------------------------- Accrued supplementary pension cost ........................ $ (1,471) $ (702) =============================
Net supplementary pension cost for the year ended December 31, included the following components:
1997 1996 1995 -------------------------- (In thousands) Service costs - benefits earned during the period .............................. $ 360 $ 172 $ 109 Interest cost on projected benefit obligation ..................................... 226 94 69 Net amortization and deferral .................... 183 64 53 -------------------------- Net supplementary pension cost ................... $ 769 $ 330 $ 231 ==========================
NOTE 22 - RENTAL EXPENSE AND COMMITMENTS: At December 31, 1997, the Corporation was obligated under a number of non-cancelable leases for land, buildings, and equipment which require rentals (net of related sublease rentals) as follows:
Minimum Sublease Year payments rentals Net ----------------------------------------------------------- (In thousands) 1998 .......... $ 17,022 $ 549 $ 16,473 1999 .......... 15,086 256 14,830 2000 .......... 13,387 180 13,207 2001 .......... 10,943 150 10,793 2002 .......... 8,375 93 8,282 Later years ... 61,216 4 61,212 ----------------------------------------------------------- $ 126,029 $ 1,232 $ 124,797 ===========================================================
Total rental expense for the year ended December 31, 1997, was $23,336,000 (1996 - $21,196,000; 1995 - $18,037,000). F-65 118 NOTE 23 - INCOME TAX: The components of income tax expense for the years ended December 31, are summarized below. Included in these amounts are income taxes of $747,000 in 1997 (1996 - $1,480,000; 1995 - $1,981,000), related to gains on securities transactions.
1997 1996 1995 ---------------------------------------- (In thousands) Current income tax expense: Puerto Rico ................................. $ 83,120 $ 81,488 $ 58,067 Federal and States .......................... 16,058 15,777 9,624 ---------------------------------------- Subtotal ................................. 99,178 97,265 67,691 ---------------------------------------- Deferred income tax expense (benefit): Puerto Rico ................................. (19,851) (23,589) (9,501) Federal and States .......................... (4,866) (2,799) 1,006 Adjustment for enacted changes in income tax laws ........................ 573 ---------------------------------------- Subtotal ................................. (24,717) (26,388) (7,922) ---------------------------------------- Total income tax expense ................. $ 74,461 $ 70,877 $ 59,769 ========================================
The reasons for the difference between the income tax expense applicable to income before provision for income taxes and the amount computed by applying the statutory rate in Puerto Rico, were as follows:
1997 1996 1995 ---------------------------------------------------------------- % of % of %of pre-tax pre-tax pre-tax Amount Income Amount Income Amount Income ---------------------------------------------------------------- (Dollars in thousands) Computed income tax at statutory rate................... $ 110,770 39% $ 99,851 39% $ 86,574 42% Benefits of net tax exempt interest income.................. (37,860) (13) (29,118) (11) (24,604) (12) Federal and States taxes and 1,551 144 (2,201) (1) other............................ ---------------------------------------------------------------- Income tax expense................ $ 74,461 26% $ 70,877 28% $ 59,769 29% ================================================================
In October 1994, a Tax Reform Act was enacted in Puerto Rico. In general terms, the Tax Reform was effective for taxable years beginning after June 30, 1995. Among its provisions, the Act reduced the maximum tax rate for corporations from 42% to 39%. The deferred taxes of the Corporation were adjusted accordingly in 1995, to reflect this tax rate reduction on those temporary differences and tax attributes that were expected to reverse or settle on or after January 1, 1996. The Act also repealed the reserve method of determining losses on loans and requires taxpayers to use the direct charge-off method and recapture the reserve balance at December 31, 1995 into income for tax purposes over a four-year period. As a result of this change, the Corporation is required to pay $15,247,000 in both, 1998 and 1999. In 1996 and 1997, the Corporation paid $14,763,000 and $14,994,000, respectively, related to the aforementioned recapture (the increase since 1997 results from the acquisition of RCB on June 30, 1997). A deferred tax asset is recorded to recognize the difference between the tax and accounting bases of the allowance for loan losses. F-66 119 Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Corporation's deferred tax assets and liabilities at December 31, were as follows:
1997 1996 ---------------------------- (In thousands) Deferred tax assets: Alternative minimum tax credits available for carryforward and other credits .......................... $ 22,353 $ 24,303 Net operating loss carryforward available .................... 1,340 292 Postretirement benefit obligation (other than pensions) ...................................... 28,069 24,966 Allowance for loan losses .................................... 50,203 18,670 Other temporary differences .................................. 16,398 22,339 ---------------------------- Total gross deferred tax assets ........................... 118,363 90,570 ---------------------------- Deferred tax liabilities: Differences between the assigned values and the tax bases of assets and liabilities recognized in purchase business combinations ....................... 11,893 16,025 Unrealized gain on securities available-for-sale ............. 11,180 1,490 Other temporary differences .................................. 11,819 8,325 ---------------------------- Total gross deferred tax liabilities ...................... 34,892 25,840 ---------------------------- Valuation allowance .......................................... 205 577 ---------------------------- Net deferred tax asset .................................... $ 83,266 $ 64,153 ============================
At December 31, 1997, the Corporation had $22,353,000 in credits expiring in annual installments through year 2014 that will reduce the regular income tax liability in future years. During 1997, the Corporation used alternative minimum tax (AMT) credits totaling $1,432,000 (1996 - $1,720,000) to reduce its regular tax liability. The Corporation had, at the end of 1997, $3,391,000 in net operating losses (NOL) available to carry over to offset taxable income in future years. These NOLs are available to carryforward until year 2004. During 1997, the Corporation used NOL carryforwards amounting to $748,000 to reduce its regular taxable income. Other temporary differences included as deferred assets are mainly related to the deferral of loan origination costs and commissions. A valuation allowance of $205,000 (1996 - $577,000) is reflected in 1997, related to deferred tax assets arising from NOL carryforwards and temporary differences for which the Corporation could not determine the likelihood of its realizability. Based on the information available, the Corporation expects to fully realize all other items comprising the net deferred tax as of December 31, 1997. Under the Puerto Rico Internal Revenue Code, the Corporation and its subsidiaries are treated as separate taxable entities and are not entitled to file consolidated tax returns. Until December 31, 1995, dividends received by the Corporation from its subsidiaries (net of an 85% dividend received deduction allowed by the former Puerto Rico Income Tax Law) were subject to Puerto Rico income tax at the normal corporate tax rates. Technical amendments to the Puerto Rico Internal Revenue Code increased the dividend received deduction to 100%, on dividends received from "controlled" subsidiaries, effective on January 1, 1996. In previous years, the Corporation did not recognize a deferred tax liability on the unremitted earnings of domestic subsidiaries since the Puerto Rico Income Tax Law provided certain alternatives to remit those earnings to the Corporation on a tax-free basis. The Corporation has never received any dividend payments from its U.S. subsidiaries. Any such dividend paid from a U.S. subsidiary to the Corporation would be subject to a 30% withholding tax based on the provisions of the U.S. Internal Revenue Code. The Corporation has not recorded any deferred tax liability on the unremitted earnings of its U.S. subsidiaries, based on the provisions of SFAS 109, which states that no recognition of a deferred tax liability is warranted for foreign subsidiaries if the indefinite reversal criteria applies. The Corporation believes that the likelihood of receiving dividend payments from any of its U.S. subsidiaries is remote, based on the significant expansions it is undertaking in the U.S. mainland. F-67 120 The Corporation's subsidiaries in the United States file a consolidated federal income tax return. The Corporation's federal income tax provision for 1997 was $9,583,000 (1996 - $12,281,000; 1995 - $9,265,000). The intercompany settlements of taxes paid is based on tax sharing agreements which generally allocates taxes to each entity based on a separate return basis. NOTE 24 - OFF-BALANCE SHEET LENDING ACTIVITIES AND CONCENTRATION OF CREDIT RISK: Off-balance sheet risk: The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of its customers and to manage its own risk arising from movements in interest rates. These financial instruments include loan commitments, letters of credit, standby letters of credit, futures contracts, options on futures contracts, interest rate swaps and caps and foreign exchange contracts. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated statement of condition. The contract or notional amount of these instruments, which are not included in the statement of condition, are an indicator of the Corporation's activities in particular classes of financial instruments. The Corporation's exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit, standby letters of credit and financial guarantees written is represented by the contractual notional amounts of those instruments. The Corporation uses the same credit policies in making these commitments and conditional obligations as it does for those reflected on the statement of condition. Financial instruments with off-balance sheet risk at December 31, whose contract amounts represent potential credit risk were as follows:
1997 1996 ------------------------------- (In thousands) Commitments to extend credit: Credit card lines....................................... $ 964,484 $ 915,589 Commercial lines of credit.............................. 1,668,221 1,374,670 Other unused commitments................................ 33,418 48,693 Commercial letters of credit.............................. 16,352 21,921 Standby letters of credit................................. 56,244 115,681 Commitments to purchase mortgage loans ................... 25,000 2,203
Commitments to extend credit: Contractual commitments to extend credit are legally binding agreements to lend money to customers at predetermined interest rates for a specified period of time. To extend credit the Corporation evaluates each customer's creditworthiness. The amount of collateral obtained, if deemed necessary, is based on management's credit evaluation of the counterparty. Collateral held varies but may include cash, accounts receivable, inventory, property, plant and equipment and investment securities, among others. The Corporation's exposure to credit loss in the event of nonperformance by the customer is represented by the contractual amount of the commitment to extend credit. Since many of the loan commitments may expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. Letters of credit: There are two principal types of letters of credit: commercial and standby letters of credit. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. In most instances, cash items are held by the Corporation to collateralize these instruments. In general, commercial letters of credit are short-term instruments used to finance a commercial contract for the shipment of goods from a seller to a buyer. This type of letter of credit ensures prompt payment to the seller in accordance with the terms of the contract. Although the commercial letter of credit is contingent upon the satisfaction of specified conditions, it represents a credit exposure if the buyer defaults on the underlying transaction. Standby letters of credit are also issued by the Corporation to disburse funds to a third party beneficiary if the Corporation's customer fails to perform under the terms of an agreement with the beneficiary. These letters of credit are used by the customer as a credit enhancement and typically expire without being drawn upon. F-68 121 Other commitments: The Corporation entered into a commitment to purchase $25,000,000 of mortgage loans from another institution with the option of purchasing additional loans up to $150,000,000. The commitment expires on June 30, 1999. The purchased mortgage loans will continue to be serviced by the originating institution. As of December 31, 1997, no loans have been purchased under this agreement. Geographic concentration: A geographic concentration exists within the Corporation's loan portfolio since most of its business activity is with customers located in Puerto Rico. As of December 31, 1997, the Corporation had no significant concentrations of credit risk and no significant exposure to highly leveraged transactions in its loan portfolio. The asset composition of the Corporation by geographical area at December 31, was as follows:
1997 1996 (Dollars in thousands) ----------------------------------------------------- Puerto Rico $14,189,332 73.5% $ 12,386,136 73.9% United States 4,616,196 23.9 3,756,526 22.4 U.S. and British Virgin Islands and Latin America 494,979 2.6 621,441 3.7 ----------------------------------------------------- $19,300,507 100.0% $16,764,103 100.0% =====================================================
Included in total assets of Puerto Rico are investments in obligations of the U.S. Treasury and U.S. Government agencies amounting to $3.8 billion and $2.9 billion in 1997 and 1996, respectively. NOTE 25 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS: The information about the estimated fair values of financial instruments required by generally accepted accounting principles is presented hereunder including some items not recognized in the statement of condition. A financial instrument is defined as cash, evidence of an ownership interest in an entity, or a contract that creates a contractual obligation or right to deliver to or receive cash or another financial instrument from a second entity on potentially favorable terms with the first entity. All nonfinancial instruments and certain other specific items are excluded from the fair value disclosure requirements. For those financial instruments with no quoted market prices available, fair values have been estimated using present value or other valuation techniques. These techniques are inherently subjective and are significantly affected by the assumptions used, including the discount rates, estimates of future cash flows and prepayment assumptions. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. The fair values reflected herein have been determined based on the prevailing interest rate environment as of December 31, 1997 and 1996, respectively. In different interest rate environments, fair value results can differ significantly, especially for certain fixed rate financial instruments and non-accrual assets. In addition, the fair values presented do not attempt to estimate the value of the Corporation's fee generating businesses and anticipated future business activities, that is, they do not represent the Corporation's value as a going concern. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Corporation. The estimated fair values of the Corporation's financial instruments, their carrying value and the methodologies used to estimate fair values are presented below. Short-term financial instruments: Short-term financial instruments, both assets and liabilities, have been valued at their carrying amounts as reflected in the Corporation's Consolidated Statements of Condition. For these financial instruments, the carrying value may approximate fair value because of the relatively short period of time between the origination of the instruments and their expected realization. F-69 122 Included in this category are: cash and due from banks, federal funds sold and securities and mortgages purchased under agreements to resell, time deposits with other banks, bankers' acceptances, customers' liabilities on acceptances, accrued interest receivable, securities sold under agreements to repurchase, acceptances outstanding and accrued interest payable. Investment and trading securities: Investment and trading securities are financial instruments which trade regularly on secondary markets. The estimated fair value of these securities was determined using either market prices or dealer quotes, where available, or quoted market prices of financial instruments with similar characteristics. The fair value of investment securities available-for-sale and trading securities equals their carrying value since they are marked-to-market for accounting purposes. These instruments are detailed in the Statements of Condition and in notes 3, 4 and 26. Loans held-for-sale: Estimated fair value of loans held-for-sale as of December 31, 1997, was $265,421,000 (1996 - $257,183,000) based on secondary market prices. Loans: Estimated fair values have been determined for groups of loans with similar financial characteristics. Loans were segregated by type such as commercial, construction, residential mortgage, consumer and credit cards. Each loan category was further segmented based on collateral, interest repricing and accrual vs. non-accrual status. For variable rate loans with frequent repricing terms and no significant change in credit risk, fair values were based on carrying values. Commercial loans with fixed rates were segregated into commercial real estate, cash collateral and other. Consumer loans were segregated by type such as personal, auto, boat, student, credit cards, reserve lines and home equity loans. Personal loans were further subdivided in mortgage-guaranteed, cash collateral and unsecured. The fair values of fixed-rate commercial, construction and consumer loans were estimated by discounting scheduled cash flows using prevailing market rates for those loans. For non-accruing loans, the estimated fair values were based on the discounted value of estimated cash flows. For these loans, principal-only cash flows were adjusted to reflect projected charge-offs. Interest cash flows were determined based on historical collection experience. Residential mortgage loans were valued using quoted market prices, where available, and market prices of traded loans with similar credit ratings, interest rates and maturity dates adjusted for estimated prepayments. Generally accepted accounting principles do not require, nor the Corporation has performed, a fair valuation of its lease financing portfolio. Therefore, for presentation purposes only, leases are shown below with fair value equal to its carrying value.
1997 1996 ------------------------------------------------------------- Estimated Estimated Carrying value fair value Carrying value fair value ------------------------------------------------------------- (In thousands) Commercial ............................ $ 4,637,409 $ 4,646,199 $3,822,096 $3,821,956 Construction .......................... 250,111 248,953 200,083 200,576 Lease financing ....................... 581,927 581,927 516,001 516,001 Mortgage .............................. 2,568,693 2,614,296 2,381,332 2,399,493 Consumer (including credit cards) ..... 3,073,264 3,013,351 2,604,387 2,656,156 Less: Allowance for loan losses ...... 211,651 185,574 ------------------------------------------------------------- $10,899,753 $11,104,726 $9,338,325 $9,594,182 =============================================================
Deposits: As specified by SFAS 107, "Disclosures about Fair Value of Financial Instruments," the fair value of deposits with no stated maturity, such as non-interest bearing demand deposits, savings, NOW and money market accounts, which at December 31, 1997 and 1996, comprised 64% and 62%, respectively, of the Corporation's total deposits, is equal to the amount payable on demand as of the respective dates. The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates offered at December 31, 1997 and 1996, respectively, for deposits with similar remaining maturities. F-70 123
1997 1996 ------------------------------------------------------------- Estimated Estimated Carrying value fair value Carrying value fair value ------------------------------------------------------------- (In thousands) Non-interest bearing deposits ......... $ 2,546,836 $ 2,546,836 $ 2,330,704 $ 2,330,704 Savings accounts ...................... 3,584,963 3,584,963 3,201,367 3,201,367 NOW and money market accounts ............................ 1,357,519 1,357,519 1,173,496 1,173,496 Certificates of deposit ............... 4,260,268 4,310,289 4,057,708 4,060,727 ------------------------------------------------------------- $11,749,586 $11,799,607 $10,763,275 $10,766,294 =============================================================
Borrowings and long-term debt: Borrowings and long-term debt, which include other short-term borrowings, notes payable, senior debentures, subordinated notes and capital securities, were valued using quoted market rates for similar instruments at December 31, 1997 and 1996, respectively. Included within other short-term borrowings at December 31, 1997, were $183,999,000 (1996 - $290,091,000) in commercial paper issued by the Corporation which has been valued at its carrying amount because of the relatively short period of time between its origination and maturity.
1997 1996 ------------------------------------------------------------- Estimated Estimated Carrying value fair value Carrying value fair value ------------------------------------------------------------- (In thousands) Other short-term borrowings ........... $ 1,287,435 $ 1,287,306 $1,404,006 $1,404,744 Notes payable ......................... 1,403,696 1,413,748 986,713 989,970 Senior debentures ..................... 30,000 30,000 Subordinated notes .................... 125,000 126,132 125,000 116,699 Capital securities .................... 150,000 158,481
Commitments to extend credit and standby letters of credit: Commitments to extend credit were fair valued using the fees currently charged to enter into similar agreements. For those commitments where a future stream of fees is charged, the fair value was estimated by discounting the projected cash flows of fees on commitments which are expected to be disbursed, based on historical experience. The fair value of letters of credit is based on fees currently charged on similar agreements. At December 31, 1997, the Corporation had $2,666,123,000 and $72,596,000 in commitments to extend credit and letters of credit, respectively (1996 - $2,338,952,000 and $137,602,000). The estimated fair value of these financial instruments with no carrying value was $8,577,000 (1996 - $9,137,000). NOTE 26 - RISK MANAGEMENT AND TRADING ACTIVITIES The Corporation's exposure to market risk relates to changes in interest rates or in the fair value of the underlying financial instruments and, to a limited extent, to fluctuations in foreign currency exchange rates. The operations are subject to the risk of interest rate fluctuations to the extent that interest-earning assets and interest-bearing liabilities mature or reprice at different times or in differing amounts. Risk management activities are aimed at optimizing net interest income, consistent with the Corporation's business strategies. Among the various methods used by the Corporation to measure the risks generated by assets and liabilities are beta-adjusted gap analysis, simulations and duration analysis. In managing its market risk the Corporation enters, to a limited extent, into certain derivative instruments that expose it to credit risk, which represent the risk that the counterparties might default on their obligations. To manage the level of credit risk the Corporation deals with counterparties of good credit standing, enters into master netting agreements whenever possible and, when appropriate, obtains collateral. Concentrations of credit risk which arise through the Corporation's trading and nontrading activities are presented in Note 24. The following table indicates the types of derivative financial instruments the Corporation held at December 31. The credit exposure is represented by the fair value of the instruments with a positive market value. The table should be read in conjunction with the descriptions of these products and the Corporation's objectives for holding them which immediately follows. F-71 124
1997 1996 ------------------------------------------------------------------------------ Notional Average for the Fair Notional Average for the Fair amount year value amount year value ------------------------------------------------------------------------------ (In thousands) Interest rate swaps: Pay floating/receive fixed ....... $ 15,000 $ 20,181 $ 108 $ 25,000 $ 21,250 $ 98 Pay fixed/receive floating ....... 215,000 167,180 (1,678) 115,000 115,000 (13) Interest rate swaptions ........... 32,271 29,360 23,277 22,149 14,683 1,233 Interest rate futures ............. 28,357 Interest rate options ............. 60,917 238,830 533 Interest rate caps ................ 3,413 1,351 41 Interest rate floors .............. 3,413 1,351 (46) Foreign exchange contracts ........ 1,234 1,047 178 748
Interest rate swaps: Interest rate swap agreements generally involve the exchange of fixed and floating rate interest payment obligations without the exchange of the underlying principal. Net interest settlements on interest rate swaps are recorded as an adjustment to interest income or interest expense of the hedged item.
1997 1996 ----------------------- (Dollars in thousands) Activity of interest rate swaps hedges for the year: Beginning balance ................................. $ 140,000 $ 125,000 New swaps ......................................... 170,000 15,000 Matured swaps ..................................... (80,000) ----------------------- Ending balance .................................... $ 230,000 $ 140,000 ======================= Pay floating/receive fixed: Weighted average receive rate at December 31 ...... 6.42% 6.54% Weighted average pay rate at December 31 .......... 5.94 5.81 Pay fixed/receive floating: Weighted average receive rate at December 31 ...... 5.88% 5.82% Weighted average pay rate at December 31 .......... 6.24 6.31
The agreements were entered into to change the Corporation's interest rate exposure and they end at the time the related obligation matures. The variable rates are based on the three-month and six-month LIBOR rates. Non-performance by any of the counterparties on this agreement will expose the Corporation to an interest rate risk which management deems to be immaterial. Interest rate swaptions: The Corporation enters into "swaption" derivative securities, which combine the characteristics of interest rate swaps and options, for hedging purposes. BPPR issues certificates of deposit with returns linked to the Standard and Poor's 500 index (the index). In order to hedge the cost of these certificates, positions in swaptions are assumed. These swaptions earn a return to the Corporation equal to the appreciation in the index throughout the life of the certificate of deposit issued. In exchange, the Corporation pays the counterparty a fixed rate of interest. Interest rate futures: Financial futures contracts are agreements to buy or sell a notional amount of a financial instrument at a given time in the future. Options on futures contracts confer the right from seller to buyer to take a future position at a stated price. Risks arise from the possible inability of counterparties to meet the terms of their contracts and from movements in securities values and interest rates. F-72 125 Interest rate options and caps: Interest rate options are contracts that grant the purchaser, for a premium payment, the right to either purchase from or sell to the writer of the option a financial instrument at a specified price within a specified period of time or on a specified date. Interest rate caps and floors are option-like contracts that require the writer to pay the purchaser at specified future dates the amount, if any, by which a specified market interest rate exceeds the fixed cap rate or falls below the fixed floor rate, applied to a notional principal amount. The option writer receives a premium for bearing the risk of unfavorable interest rate changes. Foreign exchange contracts: To satisfy the needs of its customers, from time to time, the Corporation enters into foreign exchange contracts in the spot or futures market. Spot contracts require the exchange of two currencies at an agreed rate to occur within two business days of the contract date. Forward and futures contracts to purchase or sell currencies at a future date settle over periods of up to one year, in general. Futures and forward contracts are recorded at market value. Securities sold not yet purchased: The Corporation enters in securities sold not yet purchased transactions for hedging strategies and for trading purposes. Various assets and liabilities, such as investment securities financed by borrowings, are usually hedged to lock-in spreads and reduce the risk of losses in value due to interest rate fluctuations. At December 31, 1996, securities sold short amounting to $59,315,000 were used to hedge $59,819,000 of auto loans held-for-sale. The securities sold short are recorded as other short-term borrowings on the statement of condition at market. Gains and losses are deferred until gains or losses on the related hedged item are recognized. At December 31, 1996, the Corporation had deferred gains and losses of $195,000 and $41,000, respectively, related to these activities. Open positions on securities sold short for trading purposes are usually closed at each month-end. The volume of such transactions is not significant, as further discussed below. Trading activities: The Corporation maintains limited trading positions in certain financial instruments and nonfinancial contracts including, to a limited extent, derivatives. Most of the Corporation's trading activities are limited to the purchase of debt securities for the purpose of selling them in the near term and positioning securities for resale to retail customers. Trading activities of the Corporation are subject to strict guidelines approved by the Board of Directors and included in the investment policy. In anticipation of customer demand, the Corporation carries an inventory of capital market instruments and maintains market liquidity by quoting bid and offer prices to and trading with other market makers. Positions are also taken in interest rate sensitive instruments, based on expectations of future market conditions. These activities constitute the proprietary trading business and are held by the Corporation to provide customers with financial products at competitive prices. As trading strategies depend on both market-making and proprietary positions, given the relationship between instruments and markets, those activities are managed in concert in order to maximize net trading revenue. All trading instruments are subject to market risk, the risk that future changes in market conditions may make an instrument less valuable or more onerous. Fluctuations in market prices, interest rates or exchange rates change the market value of the instruments. As the instruments are recognized at market value, these changes directly affect reported income. Exposure to market risk is managed, in accordance with risk limits set by senior management, by buying or selling instruments or entering into offsetting positions. The Corporation held no futures or options contracts written for trading purposes at December 31, 1997. For 1996, the contract amounts of futures and options written for trading purposes were $3,210,000 and $6,079,000, respectively. The following table indicates the fair value and net gains (losses) of derivatives financial instruments held for trading purposes. F-73 126
Fair Value ---------------------------------------------------------------------- At December 31, 1997 Average for the period Net gains Assets Liabilities Assets Liabilities (losses) ---------------------------------------------------------------------- (In thousands) Futures contracts...... $0 $0 $0 $1 $(23) Options................ 0 0 0 11 (41) Fair Value ---------------------------------------------------------------------- At December 31, 1996 Average for the period Net gains Assets Liabilities Assets Liabilities (losses) ---------------------------------------------------------------------- (In thousands) Futures contracts...... $0 $135 $140 $34 $(274) Options................ 0 73 0 48 121
The Corporation's credit exposure from off-balance sheet derivative financial instruments held or issued for trading purposes is represented by the fair value of the instruments with a positive fair value at that date. NOTE 27 - SUPPLEMENTAL DISCLOSURE ON THE CONSOLIDATED STATEMENTS OF CASH FLOWS: During the year ended December 31, 1997, the Corporation paid interest and income taxes amounting to $703,553,000 and $88,752,000, respectively (1996 - $579,733,000 and $76,324,000; 1995 - $515,960,000 and $42,383,000). In addition, loans transferred to other real estate and other property for the year ended December 31, 1997, amounted to $22,727,000 and $7,606,000, respectively (1996 - $3,333,000 and $5,640,000). NOTE 28 - CONTINGENT LIABILITIES: The Corporation is a defendant in a number of legal proceedings arising in the normal course of business. Management believes, based on the opinion of legal counsel, that the final disposition of these matters will not have a material adverse effect on the Corporation's financial position or results of operations. NOTE 29 - POPULAR, INC. (HOLDING COMPANY ONLY) FINANCIAL INFORMATION: The following condensed financial information presents the financial position of the Holding Company only as of December 31, 1997 and 1996 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997. F-74 127 STATEMENTS OF CONDITION
December 31, --------------------------- 1997 1996 --------------------------- (In thousands) ASSETS Cash .................................................................... $ 378 $ 191 Money market investments ................................................ 55,024 Investment securities available-for-sale, at market value ............... 88,371 69,486 Investment in BPPR, at equity ........................................... 1,255,880 1,009,648 Investment in Banco Popular, Illinois, at equity ........................ 128,089 39,820 Investment in Banco Popular, FSB, at equity ............................. 148,038 130,577 Investment in Banco Popular, N.A. (California), at equity ............... 14,187 12,566 Investment in other subsidaries, at equity .............................. 26,933 47,365 Advances to subsidiaries ................................................ 691,706 634,257 Premises and equipment .................................................. 39,176 Other assets ............................................................ 3,683 3,348 --------------------------- Total assets .......................................................... $ 2,357,265 $ 2,041,458 =========================== LIABILITIES AND STOCKHOLDERS' EQUITY Securities sold under agreements to repurchase .......................... $ 51,775 $ 52,084 Commercial paper ........................................................ 98,099 164,379 Other short-term borrowings ............................................. 21,700 65,000 Notes payable ........................................................... 535,263 320,539 Senior debentures ....................................................... 30,000 Accrued expenses and other liabilities .................................. 22,336 21,924 Subordinated notes ...................................................... 125,000 125,000 Stockholders' equity .................................................... 1,503,092 1,262,532 --------------------------- Total liabilities and stockholders' equity ............................ $ 2,357,265 $ 2,041,458 ===========================
STATEMENTS OF INCOME
Year ended December 31, ---------------------------------------- 1997 1996 1995 ---------------------------------------- (In thousands) Income: Dividends from subsidiaries ........................................ $ 53,000 $ 42,608 $ 76,600 Interest on money market and investment securities ................. 5,355 4,828 3,897 Other operating income ............................................. 496 2,394 1,347 Interest on advances to subsidiaries ............................... 45,434 42,047 26,258 ---------------------------------------- Total income ...................................................... 104,285 91,877 108,102 ---------------------------------------- Expenses: Interest expense ................................................... 53,182 42,761 25,824 Operating expenses ................................................. 1,494 1,698 671 ---------------------------------------- Total expenses .................................................... 54,676 44,459 26,495 ---------------------------------------- Income before income taxes and equity in undistributed earnings of subsidiaries ........................................... 49,609 47,418 81,607 Income taxes ......................................................... (1,573) 1,109 6,787 ---------------------------------------- Income before equity in undistributed earnings of subsidiaries ....... 51,182 46,309 74,820 Equity in undistributed earnings of subsidiaries ..................... 158,383 138,841 71,541 ---------------------------------------- Net income ........................................................ $ 209,565 $ 185,150 $ 146,361 ========================================
F-75 128 STATEMENTS OF CASH FLOWS
Year ended December 31, ---------------------------------------- 1997 1996 1995 ---------------------------------------- (In thousands) Cash flows from operating activities: Net income ......................................................... $ 209,565 $ 185,150 $ 146,361 ---------------------------------------- Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed earnings of subsidiaries ................ (158,383) (138,841) (71,541) Dividend in kind received from a subsidiary ..................... (41,600) Depreciation of premises and equipment .......................... 1,345 1,621 829 Loss on disposition of premises and equipment ................... 3,295 Gain on sale of investment securities available-for-sale ........ (824) Amortization of premiums and accretion of discounts on investments .................................................... 20 22 23 Net increase in other assets .................................... (335) (914) (1,163) Net decrease in current taxes ................................... (86) (3,182) Net decrease in interest payable ................................ (4,199) Net (decrease) increase in other liabilities .................... (2,190) 4,554 5,363 ----------------------------------------- Total adjustments ........................................... (161,357) (136,740) (108,089) ----------------------------------------- Net cash provided by operating activities ................... 48,208 48,410 38,272 ----------------------------------------- Cash flows from investing activities: Net decrease (increase) in money market investments ............... 55,024 (47,564) 581 Purchases of investment securities available-for-sale .............. (5,560) (1,538) (14,178) Maturities of investment securities available-for-sale ............. 682 883 Sales of investment securities available-for-sale .................. 2,365 Capital contribution to subsidiaries ............................... (58,500) (30,000) (16,130) Distribution from subsidiary ....................................... 392 Advances to subsidiaries ........................................... (57,449) (100,940) (374,047) Acquisition of premises and equipment .............................. (15) (3) (22) Proceeds from sale of premises and equipment ....................... 34,551 ----------------------------------------- Net cash used in investing activities ....................... (28,902) (178,770) (403,796) ----------------------------------------- Cash flows from financing activities: Net (decrease) increase in securities sold under agreements to repurchase .......................................... (309) (191) 42,425 Net (decrease) increase in commercial paper ........................ (66,280) (10,349) 41,934 Net (decrease) increase in other short-term borrowings ............. (43,300) 30,600 34,400 Net increase in notes payable ...................................... 214,724 158,039 162,500 Payment of senior debentures ....................................... (30,000) Cash dividends paid ................................................ (59,037) (51,896) (44,521) Proceeds from issuance of subordinated notes ....................... 125,000 Proceeds from issuance of common stock ............................. 4,642 4,135 3,500 Treasury stock acquired, at cost ................................... (39,559) ----------------------------------------- Net cash (used) provided by financing activities ............ (19,119) 130,338 365,238 ----------------------------------------- Net increase (decrease) in cash .................................... 187 (22) (286) Cash at beginning of period ........................................ 191 213 499 ----------------------------------------- Cash at end of period .............................................. $ 378 $ 191 $ 213 =========================================
The principal source of income for the Holding Company consists of dividends from BPPR. As a member subject to the regulations of the Federal Reserve Board, BPPR must obtain the approval of the Federal Reserve Board for any dividend if the total of all dividends declared by it in any calendar year would exceed the total of its net profits for that year, as defined by the Federal Reserve Board, combined with its retained net profits for the preceding two years. The payment of dividends by BPPR may also be affected by other regulatory requirements and policies, such as the maintenance of certain minimum capital levels. F-76 129 NOTE 30 - POPULAR INTERNATIONAL BANK, INC. (A SUBSIDIARY OF POPULAR, INC.) FINANCIAL INFORMATION: The following summarized financial information presents the consolidated financial position of Popular International Bank, Inc. and its subsidiaries as of November 30, 1997 and 1996, and the results of their operations, cash flows and changes in stockholder's equity for each of the three years in the period ended November 30, 1997. Popular International Bank, Inc., is the holding company of Popular North America, Inc., including Banco Popular North America and its wholly-owned subsidiary Banco Popular, Illinois, Banco Popular, N.A. (Texas), Banco Popular, N.A. (California), Banco Popular, N.A. (Florida) and Banco Popular, FSB (second-tier subsidiaries) and its wholly-owned subsidiary Equity One, Inc. STATEMENTS OF CONDITION
November 30, --------------------------- 1997 1996 --------------------------- (In thousands) ASSETS Cash .................................................................. $ 70,315 $ 31,171 Money market investments .............................................. 36,126 49,184 Investment securities available-for-sale, at market value ............. 323,152 205,249 Investment securities held-to-maturity, at cost ....................... 18,054 12,232 Loans held-for-sale ................................................... 50,886 48,068 Loans ................................................................. 2,127,817 1,545,262 Less: Unearned income ........................................... 55,295 47,420 Allowance for loan losses ............................. 30,907 22,920 --------------------------- 2,041,615 1,474,922 --------------------------- Other assets .......................................................... 93,120 50,672 Intangible assets ..................................................... 82,726 31,232 --------------------------- Total assets .................................................... $ 2,715,994 $ 1,902,730 =========================== LIABILITIES AND STOCKHOLDER'S EQUITY Deposits: Non-interest bearing ............................................... $ 211,396 $ 94,297 Interest bearing ................................................... 1,003,792 593,195 --------------------------- 1,215,188 687,492 --------------------------- Federal funds purchased and securities sold under agreements to repurchase ........................................................ 24,288 5,075 Other short-term borrowings, consisting of $269,732 in term notes (1996 - $375,625), and a revolving credit facility with an affiliate of $10,000 (1996 - $35,000) ................................ 279,732 410,625 Notes payable (Note 12) ............................................... 704,507 579,277 Other liabilities ..................................................... 52,473 38,722 Preferred beneficial interests in Popular North America's junior subordinated deferrable interest debentures guaranteed by the Corporation .................................................... 150,000 Stockholder's equity .................................................. 289,806 181,539 --------------------------- Total liabilities and stockholder's equity ..................... $ 2,715,994 $ 1,902,730 ===========================
F-77 130 STATEMENTS OF INCOME
Year ended November 30, ---------------------------------------- 1997 1996 1995 ---------------------------------------- (In thousands) Interest and fees: Loans .............................................................. $ 192,202 $ 136,824 $ 101,442 Money market and investment securities ............................. 24,658 16,188 18,948 ---------------------------------------- 216,860 153,012 120,390 ---------------------------------------- Interest expense: Deposits ........................................................... 35,972 24,000 21,225 Short-term borrowings .............................................. 23,092 22,572 6,595 Long-term borrowings ............................................... 55,603 35,265 39,847 ---------------------------------------- 114,667 81,837 67,667 ---------------------------------------- Net interest income .................................................. 102,193 71,175 52,723 Provision for loan losses ............................................ 17,041 14,299 8,651 ---------------------------------------- Net interest income after provision for loan losses .................. 85,152 56,876 44,072 Service charges on deposit accounts .................................. 5,588 2,735 1,844 Other service fees ................................................... 8,159 4,663 3,813 Gain on sale of securities ........................................... 339 7,026 6,239 Other operating income ............................................... 11,817 5,342 6,738 ---------------------------------------- 111,055 76,642 62,706 ---------------------------------------- Operating expenses ................................................... 85,031 46,509 35,782 ---------------------------------------- Income before income tax ............................................. 26,024 30,133 26,924 Income tax ........................................................... 11,192 12,978 10,629 ---------------------------------------- Net income ........................................................... $ 14,832 $ 17,155 $ 16,295 ========================================
F-78 131 STATEMENTS OF CASH FLOWS
Year ended November 30, -------------------------------------- 1997 1996 1995 -------------------------------------- (In thousands) -------------------------------------- Cash flows from operating activities: Net income ................................................................... $ 14,832 $ 17,155 $ 16,295 -------------------------------------- Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization of premises and equipment ..................... 3,136 1,833 1,136 Provision for loan losses ................................................... 17,041 14,299 8,651 Amortization of intangibles ................................................. 5,850 3,460 3,321 Amortization of deferred loan fees and costs ................................ (1,529) (1,922) 6,467 Amortization of premiums and accretion of discounts on investments ............................................................... 1,271 267 446 Increase in loans held-for-sale ............................................. (2,817) (24,513) Gain on sale of investment securities available-for-sale .................... (339) (7,026) (6,239) Gain on disposition of premises and equipment ............................... (655) Gain on sale of loans ....................................................... (10,133) (8,049) (6,676) Net increase in interest receivable ......................................... (5,395) (1,286) (5,375) Net increase in other assets ................................................ (5,312) (1,915) (5,046) Net increase in interest payable ............................................ 5,008 Net decrease in current and deferred taxes .................................. (3,556) (1,942) Net (decrease) increase in other liabilities ................................ (1,884) 5,392 7,509 -------------------------------------- Total adjustments ..................................................... 686 (21,402) 4,194 -------------------------------------- Net cash provided (used) by operating activities ...................... 15,518 (4,247) 20,489 -------------------------------------- Cash flows from investing activities: Net decrease (increase) in money market investments .......................... 24,058 (15,676) 3,489 Purchases of investment securities held-to-maturity .......................... (270) (6,214) Purchases of investment securities available-for-sale ........................ (526,337) (71,955) (358,811) Maturities of investment securities held-to-maturity ......................... 2,750 Sale of investment securities available-for-sale ............................. 506,365 61,205 183,091 Maturities of investment securities available-for-sale ....................... 70,092 98,011 50,000 Net disbursements on loans ................................................... (539,951) (574,754) (357,540) Proceeds from sale of loans .................................................. 294,001 285,771 70,155 Acquisition of loan portfolios ............................................... (10,853) (18,059) Assets acquired, net of cash ................................................. (36,734) (2,656) Acquisition of premises and equipment ........................................ (17,974) (4,794) (4,941) Proceeds from sales of premises and equipment ................................ 5,857 -------------------------------------- Net cash used in investing activities ................................. (228,996) (231,062) (432,616) -------------------------------------- Cash flows from financing activities: Net increase in deposits ..................................................... 56,092 42,735 43,211 Net deposits acquired ........................................................ 163,504 Net (decrease) increase in federal funds purchased and securities sold under agreements to repurchase ......................................... (169) 1,040 (8,965) Net (decrease) increase in other short-term borrowings ....................... (130,893) 222,514 (24,870) Proceeds from issuance of notes payable ...................................... 964,931 30,024 234,215 Payments of notes payable .................................................... (845,840) (84,885) Proceed from issuance of Capital Securities .................................. 150,000 Proceeds from issuance of common stock ....................................... 462 150 Capital contribution from Parent company ..................................... 58,039 29,850 -------------------------------------- Net cash provided by financing activities ............................. 252,622 241,428 407,095 -------------------------------------- Net increase (decrease) in cash and due from banks ............................. 39,144 6,119 (5,032) Cash and due from banks at beginning of year ................................... 31,171 25,052 30,084 -------------------------------------- Cash and due from banks at end of year ......................................... $ 70,315 $ 31,171 $ 25,052 ======================================
F-79 132 STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
Year ended November 30, -------------------------------------- 1997 1996 1995 -------------------------------------- (In thousands) Preferred Stock: Par value $25; authorized 25,000,000 shares, none issued Common Stock: Par value $5; authorized 1,000,000 shares, 792,300 shares issued and outstanding (1996 - 700,000; 1995 - 670,000) Balance at beginning of the period ........................................... $ 3,500 $ 3,350 $ 3,350 Issuance of common stock ..................................................... 462 150 -------------------------------------- Balance at end of the period ................................................. 3,962 3,500 3,350 -------------------------------------- Additional paid-in capital: Balance at beginning of the period ........................................... 132,964 103,114 103,114 Capital contribution from Parent company ..................................... 91,900 29,850 -------------------------------------- Balance at end of the period ................................................. 224,864 132,964 103,114 -------------------------------------- Retained earnings: Balance at beginning of the period ........................................... 44,389 27,234 10,939 Net income ................................................................... 14,832 17,155 16,295 -------------------------------------- Balance at end of the period ................................................. 59,221 44,389 27,234 -------------------------------------- Unrealized holding gains (losses) on investment securities available-for-sale, net of deferred taxes: Balance at beginning of the period ........................................... 686 5,437 (2,473) Net change in the fair value of investment securities available-for-sale, net of deferred taxes ................................... 1,073 (4,751) 7,910 -------------------------------------- Balance at end of period ..................................................... 1,759 686 5,437 -------------------------------------- Total stockholder's equity .................................................. $ 289,806 $ 181,539 $ 139,135 ======================================
NOTE 31 - POPULAR NORTH AMERICA, INC. (A SECOND - TIER SUBSIDIARY OF POPULAR, INC.) FINANCIAL INFORMATION: The following summarized financial information presents the consolidated financial position of Popular North America, Inc. and its subsidiaries, Banco Popular North America and its wholly-owned subsidiary Banco Popular, Illinois, Banco Popular, N.A. (Florida), Banco Popular, FSB, including its wholly-owned subsidiary Equity One, Inc., Banco Popular N.A. (California) and Banco Popular N.A. (Texas) (second tier subsidiaries) as of November 30, 1997 and 1996, and the results of their operations, cash flows and changes in stockholder's equity for each of the three years in the period ended November 30, 1997. F-80 133 STATEMENTS OF CONDITION
November 30, --------------------------- 1997 1996 --------------------------- (In thousands) ASSETS Cash and due from banks ............................................... $ 70,207 $ 29,936 Money market investments .............................................. 33,709 46,399 Investment securities available-for-sale, at market value ............. 323,090 205,181 Investment securities held-to-maturity, at cost ....................... 18,054 12,232 Loans held-for-sale ................................................... 50,886 48,068 Loans ................................................................. 2,127,817 1,545,262 Less: Unearned income ................................................ 55,295 47,420 Allowance for loan losses ...................................... 30,907 22,920 --------------------------- 2,041,615 1,474,922 --------------------------- Other assets .......................................................... 90,304 50,525 Intangible assets ..................................................... 82,725 31,232 --------------------------- Total assets .................................................... $ 2,710,590 $ 1,898,495 =========================== LIABILITIES AND STOCKHOLDER'S EQUITY Deposits: Non-interest bearing ................................................. $ 211,396 $ 94,297 Interest bearing ..................................................... 1,003,792 593,195 --------------------------- 1,215,188 687,492 --------------------------- Federal funds purchased and securities sold under agreements to repurchase ........................................................ 24,288 5,075 Other short-term borrowings, consisting of $269,732 term notes (1996 - $375,625) and a revolving credit facility with an affiliate of $10,000 (1996 - $35,000) ............................... 279,732 410,625 Notes payable (Note 12) ............................................... 704,507 579,277 Other liabilities ..................................................... 52,190 38,699 Preferred beneficial interests in Popular North America's junior subordinated deferrable interest debentures guaranteed by the Corporation ...................................... 150,000 Stockholder's equity .................................................. 284,685 177,327 --------------------------- Total liabilities and stockholder's equity ...................... $ 2,710,590 $ 1,898,495 ===========================
F-81 134 STATEMENTS OF INCOME
Year ended November 30, -------------------------------------- 1997 1996 1995 -------------------------------------- (In thousands) Interest and fees: Loans ........................................................................ $ 192,202 $ 136,824 $ 101,442 Money market and investment securities ....................................... 23,089 16,107 18,888 -------------------------------------- 215,291 152,931 120,330 -------------------------------------- Interest expense: Deposits ..................................................................... 35,972 24,000 21,225 Short-term borrowings ........................................................ 23,091 22,572 6,595 Long-term borrowings ......................................................... 55,602 35,265 39,847 -------------------------------------- 114,665 81,837 67,667 -------------------------------------- Net interest income ............................................................ 100,626 71,094 52,663 Provision for loan losses ...................................................... 17,041 14,299 8,651 -------------------------------------- Net interest income after provision for loan losses ............................ 83,585 56,795 44,012 Service charges on deposit accounts ............................................ 5,588 2,735 1,844 Other service fees ............................................................. 8,149 4,663 3,813 Gain on sale of securities ..................................................... 308 7,026 6,239 Other operating income ......................................................... 11,926 5,457 6,738 -------------------------------------- 109,556 76,676 62,646 -------------------------------------- Operating expenses ............................................................. 84,512 46,600 35,778 -------------------------------------- Income before tax .............................................................. 25,044 30,076 26,868 Income tax ..................................................................... 11,192 12,978 10,629 -------------------------------------- Net income ..................................................................... $ 13,852 $ 17,098 $ 16,239 ======================================
F-82 135 STATEMENTS OF CASH FLOWS
Year ended November 30, -------------------------------------- 1997 1996 1995 -------------------------------------- (In thousands) Cash flows from operating activities: Net income ................................................................... $ 13,852 $ 17,098 $ 16,239 -------------------------------------- Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization of premises and equipment ..................... 3,092 1,833 1,136 Provision for loan losses ................................................... 17,041 14,299 8,651 Amortization of intangibles ................................................. 5,850 3,460 3,321 Amortization of deferred loan fees and costs ................................ (1,529) (1,922) 6,467 Amortization of premiums and accretion of discounts on investments .............................................................. 1,271 267 446 Increase in loans held-for-sale ............................................. (2,817) (24,513) Gain on sale of investment securities available-for-sale .................... (309) (7,026) (6,239) Gain on disposition of premises and equipment ............................... (655) Gain on sale of loans ....................................................... (10,133) (8,049) (6,676) Net increase in interest receivable ......................................... (5,395) (1,286) (5,368) Net increase in other assets ................................................ (5,137) (1,884) (4,940) Net increase in interest payable ............................................ 5,001 Net increase in current and deferred taxes .................................. (3,556) (1,942) Net increase in other liabilities ........................................... (788) 5,392 7,483 -------------------------------------- Total adjustments ....................................................... 1,936 (21,371) 4,281 -------------------------------------- Net cash provided (used) by operating activities ........................ 15,788 (4,273) 20,520 -------------------------------------- Cash flows from investing activities: Net decrease (increase) in money market investments .......................... 23,438 (13,912) 3,476 Purchases of investment securities held-to-maturity .......................... (270) (6,214) Maturities of investment securities held-to-maturity ......................... 2,750 Purchases of investment securities available-for-sale ........................ (526,272) (71,888) (358,811) Sale of investment securities available-for-sale ............................. 506,255 61,205 183,091 Maturities of investment securities available-for-sale ....................... 70,092 98,011 50,000 Net disbursements on loans ................................................... (539,951) (574,754) (357,540) Proceeds from sale of loans .................................................. 294,001 285,771 70,155 Acquisition of loan portfolios ............................................... (10,853) (18,059) Assets acquired, net of cash ................................................. (36,734) (2,656) Acquisition of premises and equipment ........................................ (16,542) (4,794) (4,941) Proceeds from sale of premises and equipment ................................. 5,695 -------------------------------------- Net cash used in investing activities ................................... (228,391) (229,231) (432,629) -------------------------------------- Cash flows from financing activities: Net increase in deposits ..................................................... 56,344 42,735 43,211 Net deposits acquired ........................................................ 163,504 Net (decrease) increase in federal funds purchased and securities sold under agreements to repurchase ......................................... (169) 1,040 (8,965) Net (decrease) increase in other short-term borrowings ....................... (130,892) 222,514 (24,870) Proceeds from issuance of notes payable ...................................... 964,931 30,024 234,215 Payments of note payable ..................................................... (845,840) (84,885) Proceeds from issuance of Capital Securities ................................. 150,000 Capital contribution from Parent company ..................................... 58,500 27,000 -------------------------------------- Net cash provided by financing activities ............................... 252,874 238,428 407,095 -------------------------------------- Net increase (decrease) in cash and due from banks ............................. 40,271 4,924 (5,014) Cash and due from banks at beginning of period ................................. 29,936 25,012 30,026 -------------------------------------- Cash and due from banks at end of period ....................................... $ 70,207 $ 29,936 $ 25,012 ======================================
F-83 136 STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
Year ended November 30, -------------------------------------- 1997 1996 1995 -------------------------------------- (In thousands) Preferred Stock: Par value $0.10; authorized 10,000,000 shares, none issued Common Stock: Par value $1; authorized 10,000 shares, 2,000 shares issued and outstanding Balance at beginning and end of the period ................................... $ 2 $ 2 $ 2 -------------------------------------- Additional paid-in capital: Balance at beginning of the period ........................................... 132,163 105,163 105,163 Capital contribution from parent company ..................................... 92,440 27,000 -------------------------------------- Balance at end of the period ................................................. 224,603 132,163 105,163 -------------------------------------- Retained earnings: Balance at beginning of the period ........................................... 44,477 27,379 11,140 Net income ................................................................... 13,852 17,098 16,239 -------------------------------------- Balance at end of the period ................................................ 58,329 44,477 27,379 -------------------------------------- Unrealized holding gains (losses) on investment securities available-for-sale, net of deferred taxes: Balance at beginning of the period ........................................... 685 5,437 (2,473) Net change in the fair value of investment securities available-for-sale, net of deferred taxes ................................... 1,066 (4,752) 7,910 -------------------------------------- Balance at end of period ..................................................... 1,751 685 5,437 -------------------------------------- Total stockholder's equity .............................................. $ 284,685 $ 177,327 $ 137,981 --------------------------------------
F-84 EX-21.1 5 SCHEDULE OF SUBSIDIARIES 1 EXHIBIT 21.1 POPULAR, INC. AS OF DECEMBER 31, 1997 Subsidiaries of the registrant a. Banco Popular de Puerto Rico (Banco Popular) - A wholly-owned subsidiary Bank, incorporated under the laws of Puerto Rico in 1917. Popular Leasing & Rental, Inc. (Popular Leasing) - A wholly owned subsidiary of Banco Popular, incorporated under the laws of Puerto Rico in 1989. Popular Finance, Inc. (Popular Finance) - A wholly-owned subsidiary of Banco Popular, incorporated under the laws of Puerto Rico in 1989. Popular Mortgage Inc. (Popular Home Mortgage) - A wholly-owned subsidiary of Banco Popular, incorporated under the laws of Puerto Rico in 1995. b. Popular International Bank, Inc. - A wholly-owned subsidiary, incorporated under the laws of Puerto Rico in 1992. ATH Costa Rica, S.A. - A wholly-owned subsidiary of Popular International Bank, Inc., incorporated under the laws of Costa Rica in 1996. Popular North America, Inc. - A wholly-owned subsidiary of Popular International Bank, Inc., incorporated under the laws of Delaware in 1991. Banco Popular, FSB, A wholly-owned subsidiary of Popular North America, Inc., chartered in New Jersey in 1995. Equity One, Inc. - A wholly-owned subsidiary of Banco Popular, FSB, incorporated under the laws of Delaware in 1988. Banco Popular North America (Formerly National Bancorp, Inc. ) - A wholly-owned subsidiary of Popular North America, Inc., incorporated under the laws of Delaware in 1980. Banco Popular, Illinois (Formerly AmericanMidwest Bank and Trust) - A wholly-owned subsidiary of Banco Popular North America, incorporated under the laws of Illinois in 1914. Popular Leasing, U.S.A. - A wholly-owned subsidiary of Banco Popular, Illinois, incorporated under the laws of Delaware in 1997. 2 1 of 2 EXHIBIT 21.1 (CONT.) Banco Popular, N.A. - California (Formerly Commerce National Bank) - A wholly-owned subsidiary of Popular North America, Inc., incorporated under the laws of California in 1982. Banco Popular, N.A. (Florida) - (Formerly Seminole National Bank) - A wholly-owned subsidiary of Popular North America, Inc., incorporated under the laws of Florida in 1986. Banco Popular, N.A. (Texas) - (Formerly Citizens National Bank) - A wholly-owned subsidiary of Popular North America, Inc., incorporated under the laws of Texas in 1985. BanPonce Trust I - A wholly-owned subsidiary of Popular North America, Inc., incorporated under the laws of Delaware in 1997. c. Popular Securities Incorporated - (Formerly BP Capital Markets, Inc.) - A wholly-owned subsidiary, incorporated under the laws of Puerto Rico in 1956. d. Metropolitana de Prestamos, Inc. - A wholly-owned subsidiary, incorporated under the laws of Puerto Rico in 1960. e. Popular Assets Management, Inc. (Formerly Popular Securities Incorporated) - A wholly-owned subsidiary, incorporated under the laws of Puerto Rico in 1994 (Inactive Corporation). f. Puerto Rico Parking Corp. - A wholly-owned subsidiary, incorporated under the laws of Puerto Rico in 1963 (Inactive Corporation). EX-23.1 6 CONSENT OF INDEPENDENT AUDITORS 1 Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS 2 PRICE WATERHOUSE EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS February 20, 1998 To the Board of Directors Popular, Inc. We hereby consent to the incorporation by reference in the Prospectus constituting part of the Registration Statement on Form S-3 No. 333-26941 of Popular, Inc. of our report dated February 20, 1998, appearing on page F-37 of the Annual Report to Shareholders of Popular, Inc. which is incorporated in this Annual Report on Form 10-K. /s/ Price Waterhouse PRICE WATERHOUSE EX-27 7 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF POPULAR, INC. FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 U.S. DOLLARS YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 1,000 463,151 9,013 802,803 222,303 5,239,005 408,993 409,798 11,376,607 211,651 19,300,507 11,749,586 4,010,764 356,568 1,678,696 0 100,000 412,029 991,063 19,300,507 1,080,408 358,736 52,159 1,491,303 366,528 707,348 783,955 110,607 2,268 636,920 284,026 209,565 0 0 209,565 3.00 0 4.84 194,442 21,784 6 113,251 185,574 147,590 49,823 211,651 210,991 660 0
EX-99.1 8 REGISTRANT'S PROXY STATEMENT 1 SCHEDULE 14A (RULE 14A-101) INFORMATION REQUIRED IN PROXY STATEMENT SCHEDULE 14A INFORMATION PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE ACT OF 1934 (AMENDMENT NO. ) Filed by the Registrant [X] Filed by a Party other than the Registrant [ ] Check the appropriate box: [ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) [X] Definitive Proxy Statement [ ] Definitive Additional Materials [ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
POPULAR, INC. - -------------------------------------------------------------------------------- (Name of Registrant as Specified In Its Charter) - -------------------------------------------------------------------------------- (Name of Person(s) Filing Proxy Statement, if other than the Registrant) Payment of Filing Fee (Check the appropriate box): [X] No fee required. [ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11. (1) Title of each class of securities to which transaction applies: (2) Aggregate number of securities to which transaction applies: (3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined): (4) Proposed maximum aggregate value of transaction: (5) Total fee paid: [ ] Fee paid previously with preliminary materials: [ ] Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. (1) Amount Previously Paid: (2) Form, Schedule or Registration Statement No.: (3) Filing Party: (4) Date Filed: 2 POPULAR, INC. P.O. BOX 362708 SAN JUAN, PUERTO RICO 00936-2708 -------------------- NOTICE OF ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON THURSDAY, APRIL 23, 1998 -------------------- To the Stockholders of Popular, Inc. NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of Popular, Inc. (the "Meeting") for the year 1998 will be held at 10:00 a.m. on Thursday, April 23, 1998, on the third floor of the Centro Europa Building, in Santurce, Puerto Rico, to consider and act upon the following matters: (1) To elect five (5) directors of Popular, Inc. (the "Corporation" ) for a three-year term; and (2) To transact any and all other business as may be properly brought before the Meeting or any adjournments thereof. Management at present knows of no other business to be brought before the Meeting. Stockholders of record at the close of business on March 4, 1998, are entitled to notice of and vote at the Meeting. You are cordially invited to attend the Meeting. Whether you plan to attend or not, please sign and return the enclosed proxy so that the Corporation may be assured of the presence of a Quorum at the Meeting. A postage-paid envelope addressed to the Corporation is enclosed for your convenience. San Juan, Puerto Rico, March 18, 1998. By Order of the Board of Directors, SAMUEL T. CESPEDES Secretary 3 POPULAR, INC. P.O. BOX 362708 SAN JUAN, PUERTO RICO 00936-2708 ----------------- PROXY STATEMENT FOR THE ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON THURSDAY APRIL 23, 1998 ----------------- This Proxy statement is furnished in connection with the solicitation by the Board of Directors of Popular, Inc. (the "Corporation") of Proxies to be voted at the Annual Meeting of Stockholders (the "Meeting") to be held at 10:00 a.m. on Thursday, April 23, 1998, on the third floor of the Centro Europa Building, in Santurce, Puerto Rico, and any adjournments thereof. Enclosed with this Proxy Statement is the Annual Report, including Form 10-K and the financial statements for the year ended December 31, 1997, duly certified by Price Waterhouse as independent public accountants. This Proxy Statement, the enclosed Annual Report and Form 10-K, the Notice of Annual Meeting of Stockholders and the form of proxy are being sent to stockholders on or about March 18, 1998. Properly executed proxies received by the Secretary of the Corporation will be voted at the Meeting in accordance with the instructions which appear therein and for the purposes indicated on the Notice of Meeting. The Board of Directors does not intend to present any business at the Meeting other than those included in the Notice of Meeting. The Board of Directors at this time knows of no other matters which may come before the Meeting. However, if any new matters requiring the vote of the stockholders properly come before the Meeting, proxies may be voted with respect thereto in accordance with the best judgement of Proxyholders, under the discretionary power granted by stockholders to their proxies in connection with general matters. SOLICITATION OF PROXIES In addition to solicitation by mail, management may participate in the solicitation of Proxies by telephone, personal interviews or otherwise. The Board of Directors has engaged the firm of Georgeson & Company Inc. to aid in the solicitation of Proxies. The cost of solicitation will be borne by the Corporation and is estimated at $6,500. REVOCABILITY OF PROXY Any stockholder giving a proxy has the power to revoke it before the proxy is exercised. The grantor may revoke the proxy by claiming at the Meeting the right to vote by himself the shares of stock registered in his name or by notice of revocation in writing to the President or Secretary of Popular, Inc., P.O. Box 362708, San Juan, Puerto Rico 00936-2708, delivered before the proxy is exercised. VOTING SECURITIES The only outstanding voting securities of the Corporation are its shares of common stock, each share of which entitles the holder thereof to one vote. Only common stockholders of record at the close of business on March 4, 1998 (the "Record Date"), will be entitled to vote at the Meeting and any adjournments thereof. On the Record Date there were 67,717,548 shares of common stock of Popular, Inc. outstanding. The shares covered by any such proxy that are properly executed and received by management before 10:00 a.m. on the day of the Meeting will be voted. 2 4 The presence, in person or by proxy, of the holders of a majority of the outstanding shares of common stock of the Corporation is necessary to constitute a quorum at the Meeting. Votes cast by proxy or in person at the Meeting will be counted by the persons appointed by the Corporation as members of the vote-counting committee for the Meeting. For purposes of determining quorum, the members of the vote-counting committee will treat abstentions and brokers non-votes as shares that are present and entitled to vote. A broker non-vote results when a broker or nominee has expressly indicated in the proxy that it does not have discretionary authority to vote on a particular matter. As to the election of Directors, the proxy card being provided by the Board of Directors enables a stockholder to vote for the election of the nominees proposed by the Board, or to withhold authority to vote for one or more of the nominees being proposed. Directors will be elected by a majority of the votes cast. Therefore, abstention and broker non-votes will not have an effect on the election of directors of the Corporation. PRINCIPAL STOCKHOLDERS Following is the information, to the extent known by the persons on whose behalf this solicitation is made, with respect to any person (including any "group" as that term is used in Section 13(d)(3) of the Securities and Exchange Act of 1934, as amended) who is known to the Corporation to be the beneficial owner of more than 5 percent of the Corporation's voting securities.
Amount and nature Percent of beneficial of Title of Class Name and address of beneficial owner ownership (1) Class(2) - -------------- ------------------------------------ ------------- -------- Common ............ Banco Popular de Puerto Rico (the "Bank") As Trustee for Banco Popular de Puerto Rico Retirement Plan 2,836,430 The Bank as Trustee for the Profit Sharing Plan for the Employees of Banco Popular de Puerto Rico 2,660,104 --------- 5,496,534 (3) 8.1169 Common ............ State Farm Mutual Automobile Insurance Company 3,418,262 (4) 5.0478
- ------------- (1) As of February 27, 1998. (2) Based on 67,717,548 shares of common stock outstanding. (3) The Bank, as Trustee, administers both Plans through their Administrative Committees, with sole voting and investment power. (4) On January 20, 1998 State Farm Mutual Automobile Insurance Company ("State Farm") and affiliated entities filed a joint statement on Schedule 13-G with the Securities and Exchange Commission reflecting its holdings as of December 31, 1997. According to said statement, State Farm and its affiliates might be deemed to constitute a "group" within the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934. State Farm and its affiliates could also be deemed to be the beneficial owners of 3,418,262 shares of Popular, Inc. However, State Farm and each such affiliate disclaim beneficial ownership as to all shares as to which each such person has no right to receive the proceeds of sale of the shares, and also disclaim that they constitute a "group". 3 5 SHARES BENEFICIALLY OWNED BY DIRECTORS, NOMINEES AND EXECUTIVE OFFICERS OF THE CORPORATION Following is the information, as of February 27, 1998, as to equity securities of the Corporation beneficially owned by all current directors, nominees, the most highly compensated Executive Officers of the Corporation who are not directors and the total owned by directors, nominees and all Executive Officers of the Corporation as a group: COMMON STOCK
Title Amount and Nature Percent of Name of class of Beneficial Ownership class (1) ---- -------- ----------------------- --------- Salustiano Alvarez Mendez .......... Common 70,360 .1039 Alfonso F. Ballester ............... Common 689,522(3) 1.0182 Juan J. Bermudez ................... Common 161,003(4) .2378 Francisco J. Carreras .............. Common 5,964 .0088 Richard L. Carrion ................. Common 517,941(5) .7649 David H. Chafey Jr ................ Common 37,501 .0554 Luis E. Dubon Jr ................... Common 543,672(6) .8029 Antonio Luis Ferre ................. Common 1,436,194(7) 2.1209 Hector R. Gonzalez ................. Common 280,634(8) .4144 Jorge A. Junquera .................. Common 21,170(9) .0313 Manuel Morales Jr .................. Common 359,401(10) .5307 Alberto M. Paracchini .............. Common 56,231(11) .0830 Francisco M. Rexach Jr ............. Common 74,127(12) .1095 J. Adalberto Roig Jr ............... Common 237,865(13) .3513 Felix J. Serralles Jr .............. Common 179,830(14) .2656 Julio E. Vizcarrondo Jr ............ Common 562,971(15) .8314 Maria Isabel P. de Burckhart ....... Common 26,013(16) .0384 Roberto R. Herencia ................ Common 5,966 .0088 Larry B. Kesler .................... Common 19,019 .0281 Humberto Martin .................... Common 32,339 .0478 Emilio E. Pinero ................... Common 14,249 .0210 Carlos Rom Jr ...................... Common 11,119(17) .0164 Carlos J. Vazquez .................. Common 49,704(18) .0734 All Directors and Executive Officers of the Corporation as a group ..... Common 5,392,795 7.9637
PREFERRED STOCK
Title Amount and Nature Percent of Name of class of Beneficial Ownership class (2) ---- -------- ----------------------- --------- Salustiano Alvarez Mendez .......... Preferred 7,000 .1750 Luis E. Dubon Jr ................... Preferred 7,825(19) .1956 Alberto M. Paracchini .............. Preferred 7,000 .1750 Carlos J. Vazquez .................. Preferred 4,568(20) .1142 All Directors and Executive Officers of the Corporation as a group ..... Preferred 26,393 .6598
4 6 (1) Based on 67,717,548 shares of common stock outstanding. (2) Based on 4,000,000 shares of preferred stock outstanding. (3) Mr. Ballester owns 687,522 shares and has indirect investment power over 2,000 shares owned by his wife. Excludes 600,964 shares owned by his sister Mrs. Griselda Ballester, as to all of which shares Mr. Ballester disclaims indirect voting power. (4) Excludes 6,151 shares owned by his wife, as to which Mr. Bermudez disclaims indirect voting power. (5) Mr. Carrion owns 139,318 shares and also has indirect investment power over 12,070 shares owned by his children. Junior Investment Corporation owns 2,103,000 shares of the Corporation. Mr. Carrion owns 17.43% of the shares of said corporation. (6) Mr. Dubon owns 41,034 shares and has a power of attorney over 57,608 shares owned by his wife, over 36,430 shares held in trust for his children and 595,407 shares owned by various corporations and members of his family in which Mr. Dubon has direct or indirect ownership. Mr. Dubon disclaims indirect voting power and investment authority over 186,807 shares owned by his brother, nieces and DW Group, Inc. (7) Mr. Ferre has indirect investment and voting power and claims beneficial ownership of 1,436,194 shares of the Corporation. Mr. Ferre owns 803 shares and has indirect investment and voting power over 250,600 shares owned by Alfra Investment Corp., 1,600 shares owned by South Management, Inc. and 200 shares owned by his wife. Mr. Ferre owns 85.12% of Ferre Investment Fund, Inc., which owns 460,635 shares of the Corporation. Mr. Ferre also owns 64.39% of the shares of El Dia, Inc., and has indirect voting power over Alfra Investment Corp., which owns 19.10% of El Dia, Inc., which owns in turn 722,356 shares of the Corporation. (8) Mr. Gonzalez owns 267,958 shares and has voting and investment power over 12,676 shares of the Corporation owned by TPC Financial Services, Inc. of which he is President and Chief Executive Officer. (9) Mr. Junquera owns 20,830 shares and has indirect investment power over 101 shares owned by his wife and over 239 shares owned by his daughter. (10) Mr. Morales owns 159,347 shares and has voting power over 200,054 shares owned by his parents, as their attorney-in-fact. (11) Excludes 632 shares owned by his wife, as to which Mr. Paracchini disclaims beneficial ownership. (12) Mr. Rexach owns 37,127 shares and has indirect voting power over 30,000 shares owned by his mother, as her attorney-in-fact, and over 7,000 shares held by Capital Assets, Inc. as President and shareholder. (13) Mr. Roig owns 225,271 shares and has indirect voting power over 12,594 shares owned by his wife. (14) Mr. Serralles owns 113,376 shares, and has indirect voting power over 5,146 shares owned by his wife. Mr. Serralles owns 100% of the shares of each of Capitanejo, Inc. and Fao Investments, Inc., which own 58,510 and 2,798 shares, respectively, of the Corporation. (15) Mr. Vizcarrondo owns 99,868 shares and has indirect voting power over 90,662 shares owned by his wife. Mr. Vizcarrondo's wife owns 17.71% of the shares of Junior Investment Corporation, which owns 2,103,000 shares of the Corporation. Mr. Vizcarrondo has indirect voting and investment power over 402 shares held in trust by Vicar Enterprises, Inc. for the benefit of his children, for which he disclaims beneficial ownership. Mr. Vizcarrondo also disclaims beneficial ownership over 63,573 shares owned by DMI Pension Trust, where he serves as trustee and member of the investment committee. Excluded also are 11,649 shares owned by Mr. Vizcarrondo as trustee of the Suarez Toro Trust, which owns said shares of the Corporation, of which he disclaims beneficial ownership. (16) Mrs. Burckhart owns 24,564 shares and has indirect voting power over 1,449 held by her husband as custodian for her daughters. (17) Mr. Rom owns 10,816 shares and has indirect voting power over 69 shares owned by his wife and 234 shares held by him as custodian for various members of his family. (18) Mr. Vazquez owns 3,374 shares and has investment authority over 46,330 shares held by various family members. (19) Mr. Dubon owns 1,450 preferred shares, and has indirect voting power over 5,875 preferred shares held in trust by Mr. Luis E. Dubon Jr. for several persons. Mr. Dubon also has indirect ownership over 500 preferred shares owned by Fundacion Gogui, Inc. (20) Mr. Vazquez has investment authority over 4,568 preferred shares held by various family members. 5 7 SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Based on a review of Forms 3, 4 and 5 and amendments thereto furnished to the Corporation with respect to its 1997 fiscal year, pursuant to Section 16(a) of the Securities Exchange Act of 1934, the following people, subject to Section 16(a), failed to file on a timely basis:
Name Number of late reports Number of transactions - ---- ---------------------- ---------------------- Salustiano Alvarez Mendez 2 2 Antonio Luis Ferre 1 1 Francisco M. Rexach Jr 1 2 Emilio Jose Venegas 1 5 Julio E. Vizcarrondo Jr 2 2 Maria Isabel P. Burckhart 1 1 David H. Chafey Jr 1 1 Humberto Martin 1 1
The Corporation has no knowledge of any additional failure to file a required Form. BOARD OF DIRECTORS AND COMMITTEES ELECTION OF DIRECTORS The Certificate of Incorporation and the By-laws of the Corporation establish a classified Board of Directors pursuant to which the Board of Directors is divided into three classes as nearly equal in number as possible, with each class having at least three members and with the term of office of one class expiring each year. Each director serves for a term ending on the date of the third annual meeting of stockholders following the annual meeting at which such director was elected. At the Meeting, five (5) directors assigned to "Class 2" are to be elected until the 2001 Annual Meeting of Stockholders or until their respective successors shall have been elected and qualified. The directors nominated for election are: Luis E. Dubon Jr., Hector R. Gonzalez, Manuel Morales Jr., Francisco M. Rexach Jr. and Julio E. Vizcarrondo Jr. All of the above will serve for three (3) years until the 2001 Annual Meeting of Stockholders or until their respective successors shall have been elected and qualified. The remaining 11 directors of the Corporation will serve as directors, as follows: until the 1999 Annual Meeting of Stockholders of the Corporation, in the case of those seven directors assigned to "Class 3", and until the 2000 Annual Meeting of Stockholders, in the case of those four directors assigned to "Class 1", or in each case until their successors are duly elected and qualified. The people named as proxies in the accompanying Form of Proxy have advised the Corporation that, unless otherwise instructed, they intend to vote at the meeting the shares covered by the proxies FOR the election of the five nominees named above, and that if any one or more of such nominees should become unavailable for election they intend to vote such shares FOR the election of such substitute nominees as the Board of Directors may propose. The Corporation has no knowledge that any nominee will become unavailable for election. Information relating to principal occupation and business experience during the past five (5) years (including position held with the Corporation or the Bank), age and the period during which each director has served is set forth below. 6 8 BOARD OF DIRECTORS NOMINEES FOR ELECTION AS DIRECTORS (TERMS EXPIRING IN 2001) CLASS 2 DIRECTORS
DIRECTOR OF PRINCIPAL OCCUPATION AND BUSINESS THE CORPORATION NAME AGE EXPERIENCE DURING THE PAST FIVE YEARS SINCE ---- --- ------------------------------------- ----- Luis E. Dubon Jr............63 Attorney-at-Law and Investor. Partner of the 1984 law firm Dubon & Dubon. Director and stockholder of D Group Capital Corporation, TL Group Corporation, Delta Maintenance Services Inc. Director and partner of D Group Equity Holding Associates, S. en C. por A., S.E., and D Group Commercial Equities Associates S. en C. por A., S.E. Director of American Investment Corp., Fundacion Gogui, Inc., Carite Resorts Associates, S. en C. por A., S.E., Carite Resorts GP, Inc., Carolina Developers Associates, S. en C. por A., S.E., Contorno Developers Associates, S. en C. por A., S.E., Contorno Developers GP, Inc., D Group Commercial Equities GP, Inc., D Group Equities Management Services, Inc., D Group Equity Holding GP, Inc., D Group Realty Services, Inc., Delta Engineering Services, Inc., Delta Parking System Corporation, Dubon Corporation, Executive Habitats, Inc., Galeria del Condado Associates, S. en C. por A., S.E., Galeria del Condado GP, Inc., Imporexco, Inc., Lujoma Corporation, Marina Developers (Carolina) GP, Inc., Mercantil Caguax Associates, S. en C. por A., S.E., Mercantil Caguax GP, Inc., Mercantil Mayaguez Associates, S. en C. por A., S.E., Mercantil Mayaguez GP, Inc., Mercantil Pinero Associates, S. en C. por A., S.E., Mercantil Pinero GP, Inc., Mercantil San Patricio Associates, S. en C. por A., S.E., Mercantil San Patricio GP, Inc., Metro Center Associates, S. en C. por A., S.E., Metro Center GP Corporation, Plaza Bellas Artes GP, Inc., Plaza Bellas Artes Associates Uno S. en C. por A., S.E., Plaza Bellas Artes GP, Inc. Uno, Plaza Bellas Artes Associates Dos S. en C. por A., S.E., Plaza Bellas Artes Associates Tres S. en C. por A., S.E., Plaza Bellas Artes Associates IV, S. en C. por A., S.E., Plaza del Condado Associates, S. en C. por A., S.E., Plaza del Condado GP, Inc., Portilla Corporation, Puerta del Condado Associates, S. en C. por A., S.E., Puerta del Condado GP Inc., Resort Equities Developers GP, Inc., San Jose Building Associates, S. en C. por A., S.E., San Jose Building GP, Inc., Title & Corporate Services Corporation and San Jose Development, Inc. Director of Banco de Ponce from 1973 to 1990. Director of the Bank since 1990.
7 9 BOARD OF DIRECTORS NOMINEES FOR ELECTION AS DIRECTORS (TERMS EXPIRING IN 2001) CLASS 2 DIRECTORS
Director of Principal occupation and business the Corporation Name Age experience during the past five years since ---- --- ------------------------------------- ----- Hector R. Gonzalez..........64 President and Chief Executive Officer of TPC 1984 Communications of PR, Inc., owner and operator of cable television systems. President and Chief Executive Officer of TPC Financial Services, Inc., TPC Cable Media, TelePonce Cable TV and Telecell Systems. Director of Damas Foundation, Inc. Director of Popular Finance, Inc. and Popular Mortgage, Inc. Director of Banco de Ponce from 1973 to 1990. Director of the Bank since 1995. Manuel Morales Jr...........52 President of Selarom Capital Group, Inc. 1990 President of Parkview Realty, Inc., of the Atrium Office Center, Inc., of HQ Business Center P.R., Inc., of Executrain of Puerto Rico and of Office & Home, Inc. Honorary General Consul of Japan in San Juan. Trustee of Sacred Heart University, of the Caribbean Environmental Development Institute and of Fundacion Angel Ramos, Inc. Member of the Board of Directors of Better Business Bureau. Member of the Board of Trustees of Fundacion Banco Popular, Inc. Chairman of the Audit Committee of the Corporation and the Bank. Director of the Bank since 1978. Francisco M. Rexach Jr......60 President of Ready Mix Concrete, Inc. a 1990 subsidiary of PRCC (a registered public company) until September 1997. President of Capital Assets, Inc. since November 1995. Chairman of Rexach Consulting Services. Director of Popular Leasing & Rental, Inc. Chairman of the Human Resources and Compensation Committee of the Bank. Director of the Bank since 1984. Julio E. Vizcarrondo Jr.....63 Civil Engineer. President/Partner and Chief 1990 Executive Officer of Desarrollos Metropolitanos, S.E., VMV Enterprises Corp., Resort Builders, S.E., Metropolitan Builders, S.E., Institutional Builders, S.E., corporations engaged in the development and construction of residential, commercial, industrial and institutional projects in Puerto Rico. Director of the Bank since 1984. CLASS 3 DIRECTORS (TERMS EXPIRING IN 1999) Juan J. Bermudez............60 Electrical Engineer. Partner of Bermudez and 1990 Longo, S.E., Decemcor, S.E., Unicenter, S.E., Unicourts, S.E., Unieast, S.E., Unigardens, S.E., Baldwin Development, S.E., Paseo Sereno, S.E., Tivoli, S.E., Clearview, S.E., Placid Park, S.E. and PCME Commercial, S.E. Principal Stockholder and Director of BL Management, Corp., Paseomar Corp., PCME Development, Inc., G.S.P. Corp., Unimanagement Corp., Lab Properties, Inc. and Homes Unlimited Corp. Chairman of the Trust Committee of the Bank. Director of the Bank since 1985. Francisco J. Carreras.......65 Former professor of the University of Puerto 1990 Rico. Former President of the Catholic University of P.R. Member of the Board of Trustees of Fundacion Banco Popular, Inc. Executive Director of Fundacion Angel Ramos, Inc. Chairman of the Community Reinvestment Committee of the Bank. Director of the Bank since 1979.
8 10 CLASS 3 DIRECTORS (TERMS EXPIRING IN 1999)
Director of Principal occupation and business the Corporation Name Age experience during the past five years since ---- --- ------------------------------------- ----- Richard L. Carrion..........45 Chairman, President and Chief Executive 1990 Officer ("CEO") of the Corporation, and the Bank. Chairman of Popular International Bank, Inc., Popular North America, Inc. and Banco Popular, FSB. Chairman of the Board of Trustees of Fundacion Banco Popular, Inc. Director of Equity One, Inc., Popular Finance, Inc., Popular Leasing & Rental, Inc., Popular Mortgage, Inc. and Popular Securities Incorporated. Member of the International Olympic Committee. President of the Puerto Rico Olympic Trust and Member of the Puerto Rico Olympic Committee. Member of Board of Directors and Compensation Committee of Pueblo Xtra International, Inc. until March 31, 1995. Chairman and President of Puerto Rico Investors Tax-Free Funds, Inc. I, II, III, IV, V and of Puerto Rico Tax-Free Target Maturity Fund, Inc. I and II. Member of the Board of Directors of the Company for the Development of the Cantera Peninsula and the Board of Trustees of the Puerto Rico Committee for Economic Development.Member of the Board of Directors and of the Benefits & Human Resources Committees of Bell Atlantic Corporation (registered public company). Member of the Board of the National Museum of American History since January 1998. Chairman of the Executive Committee of the Corporation. Director of the Bank since 1982. David H. Chafey Jr..........44 Supervisor of Bank's Retail Banking Group 1996 since January 1996. Supervisor of the Financial Management Group and U.S. Operations until December 1995. Senior Executive Vice President since October 1995. Executive Vice President of the Bank since January 1990. Chairman of Popular Securities Incorporated until January 1996. Executive Vice President and Director of Popular International Bank, Inc. and Popular North America, Inc. President of Popular International Bank, Inc. and Popular North America, Inc. until December 1995. Director of Equity One, Inc., Popular Leasing & Rental, Inc., Popular Securities Incorporated and Banco Popular, FSB. Chairman of the Board of Popular Finance, Inc. Chairman of the Puerto Rico Telephone Authority from 1993 thru 1997. Executive Vice President of Puerto Rico Investors Tax-Free Fund, Inc. I, II, III, IV, V and Puerto Rico Tax-Free Target Maturity Fund, Inc. I and II. Chairman of the Board of Grupo Guayacan, Inc. since 1996. Member of the Board of San Jorge Children's Research Foundation since 1996, United Way of Puerto Rico, Park Conservation Trust of Puerto Rico, Governor's Economic Council on Productivity and the Steering Committee of Private Capital of Puerto Rico since 1994. Director of the Bank since 1994.
9 11 CLASS 3 DIRECTORS (TERMS EXPIRING IN 1999)
Director of Principal occupation and business the Corporation Name Age experience during the past five years since ---- --- ------------------------------------- ----- Antonio Luis Ferre..........64 Vice Chairman of the Board of Directors of 1984 the Corporation and the Bank. Chairman of the Board of Puerto Rican Cement Co., Inc. (a registered public company), manufacturers of cement and allied products. President and Editor of El Dia, Inc., a newspaper publishing company. Director of Metropolitan Life Insurance Company (a registered company under the Investment Company Act of 1940) until December 1995. Member of the Director's Committee of Metropolitan Life Insurance Company since January 1, 1996. Director of Pueblo Xtra International, Inc. until March 1995. Director of Pueblo Xtra Supermarkets until 1995. Director of Banco de Ponce from 1959 to 1990. Director of the Bank since 1990. Alberto M. Paracchini.......65 Former Chairman of the Board of Directors of 1984 the Corporation and the Bank. Former Chairman of Popular North America, Inc., Equity One, Inc., Popular Finance, Inc. and Popular Leasing & Rental, Inc. Member of the Board of Trustees of Fundacion Banco Popular, Inc. Chairman of the Board of Trustees, Sacred Heart University in San Juan, Puerto Rico. Director of Puerto Rican Cement Co., Inc. (a registered public company). Director of HDA Management Associates since 1993. Director of Equus Management Co., Inc., Managing General Partner of Equus Gaming Co., L.P. (listed on the American Stock Exchange). Director of Venture Capital Fund, Inc. Executive Officer of the Corporation from 1984 to April 1993. Director of Banco de Ponce from 1959 to 1990. Chairman of the Investment Committee of the Bank. Director of the Bank since 1990. Felix J. Serralles Jr.......63 President and Chief Executive Officer of 1984 Empresas Serralles, Inc. and of its subsidiary Destileria Serralles, Inc., manufacturers and distributors of distilled spirits, and of its affiliate Mercedita Leasing, Inc. Director of Banco de Ponce from 1966 to 1990. Director of the Bank since 1990. CLASS 1 DIRECTORS (TERMS EXPIRING IN 2000) Salustiano Alvarez Mendez....................68 President and Director of Mendez & Company, 1997 Inc., food and liquor importers and distributors. Director of International Shipping Agency, Inc., shipping agents. Director of Menaco Corp., Guaynabo Realty S.E. and A. & D. Associates, Inc. ALECO Realty and Bamco Products Corp. until 1995. Director of Banco de Ponce from 1981 to 1990 and of the Bank from 1991 to April 1997. Alfonso F. Ballester........68 Vice Chairman of the Board of Directors of 1990 the Corporation and the Bank. President of Ballester Hermanos, Inc. (Wholesale of provisions and liquors). Director of Popular International Bank, Inc., Popular North America, Inc., Banco Popular, FSB, Equity One, Inc., Popular Securities Incorporated and Popular Leasing & Rental, Inc. Chairman of the Commercial Credit Committee of the Bank. Director of the Bank since 1975.
10 12 CLASS 1 DIRECTORS (TERMS EXPIRING IN 2000)
Director of Principal occupation and business the Corporation Name Age experience during the past five years since ---- --- ------------------------------------- ----- Jorge A. Junquera...........49 Supervisor of the Financial Management 1990 Group, the U.S. Operations and the Caribbean and Latin America Expansion Group since January 1996. Supervisor of the Bank's Retail Banking Group until December 1995. Senior Executive Vice President since October 1995. Executive Vice President of the Bank since 1980. President and Director of Popular International Bank, Inc. and Popular North America, Inc. since January 1996. Director of Equity One, Inc., Popular Finance, Inc., Banco Popular, Illinois, Banco Popular, N.A. (California), Banco Popular, N.A. (Florida), Banco Popular, N.A. (Texas), Popular Mortgage, Inc. and Popular Leasing & Rental, Inc. Chairman of the Board of Popular Securities Incorporated since January 1996. President of Puerto Rico Tourism Company until February 1997 and President of Hotel Development Co. since 1993. Director of YMCA since 1988. Director of the Bank since 1990. J. Adalberto Roig Jr........67 Chairman of the Board of Antonio Roig 1997 Sucesores, Inc., Desarrollos Agricolas del Este, S.E. and Desarrollos Roig, S.E. President of Jarofe Investment, Inc., Ferrocarriles del Este and of East Porto Rico Sugar Co. Chairman of the Board and President of Roig Commercial Bank until June 1997.
STANDING COMMITTEES The Board of Directors of the Corporation met on a monthly basis during 1997. All directors attended 75% or more of the meetings of the Board of Directors and the committees of the Board of Directors on which such directors served. The Corporation's Board of Directors has a standing Audit and Executive Committee. The Board of Directors of the Bank, the principal subsidiary of the Corporation, has a standing Human Resources and Compensation Committee that may review compensation matters for the Corporation. There is no standing Nominating Committee but the Executive Committee charter provides that said Executive Committee may exercise the power to nominate directors. However, in the past the Executive Committee has not exercised such function and nominations have been made by the Board of Directors. Information regarding the Audit and Human Resources Committees follows: AUDIT COMMITTEE The functions of the Audit Committee include reviewing the accounting principles and practices employed by the Corporation, and compliance with applicable laws and regulations. The Committee meets with the Corporation's independent external auditors to review their audit procedures, the report on their examination of the Corporation's financial statements, and their comments on the system of internal controls. Also, the Committee oversees the internal audit function and reviews the reports prepared by the Auditing Division on their examinations of the operating and business units and for any other special examinations that may be required. The Committee held four meetings during the fiscal year ended December 31, 1997. The Committee members during 1997 were: Salustiano Alvarez Mendez, Juan J. Bermudez, Francisco J. Carreras, Luis E. Dubon Jr., Manuel Morales Jr. and Julio E. Vizcarrondo Jr. None of the members of the committee are officers or employees of the Corporation or any of its subsidiaries. 11 13 HUMAN RESOURCES AND COMPENSATION COMMITTEE The functions of the Human Resources and Compensation Committee include reviewing the compensation and benefits of management and employees, reviewing the policies related to the performance and compensation of management and employees, and reviewing the long-range planning for executive development and succession. The Committee held one meeting during the fiscal year ended December 31, 1997. The Committee members during 1997 were: Salustiano Alvarez Mendez, Esteban D. Bird, Hector R. Gonzalez, Francisco M. Rexach Jr. and Julio E. Vizcarrondo Jr. None of the members of the Committee are officers or employees of the Corporation or any of its subsidiaries. COMPENSATION OF DIRECTORS Directors who are not employees of the Corporation and its subsidiaries were entitled to be reimbursed for certain expenses up to $12,000 annually. The Board of Directors of the Corporation has a Stock Deferment Plan, pursuant to which each outside director of the Corporation will be given the option to defer all or a portion of the $12,000 annual retainer. The deferred portion, plus an additional amount of $0.25 for each dollar so deferred, being applied toward the purchase in the open market of shares of the Corporation's common stock on behalf of the director, with the certificates representing such shares to be retained by the Corporation until the director's term in every Board terminates. In addition, each director shall have the right to vote and to receive any dividends payable on the shares held for said director under the Plan, but no such shares shall be sold, transferred, assigned, pledged or in any other way encumbered by the director until the certificates representing such shares are delivered to the director. In the event that a director is removed for cause from office by appropriate corporate action or under authority of law, said director (1) shall be obligated to sell to the Corporation all of the shares acquired with the deferred retainer amount at a price equal to the lower of (a) the actual cost of the purchase of said shares and (b) the market price of said shares on the date the director was discharged, and (2) shall forfeit to the Corporation all of the shares purchased with any additional contribution. In addition directors receive $750 for attending each Board of Directors' meeting, $1,000 for attending each Executive Committee meeting and $500 for attending each of the others committee meetings. Directors who are employees do not receive fees for attending Board of Directors and committee meetings. EXECUTIVE OFFICERS The following table sets forth the names of the executive officers (the "Executive Officers") of the Corporation including their age, business experience during the past five (5) years and the period during which each such person has served as an Executive Officer of the Corporation or the Bank.
EXECUTIVE OFFICER OF THE PRINCIPAL OCCUPATION AND BUSINESS CORPORATION NAME TITLE AGE EXPERIENCE DURING THE PAST FIVE YEARS SINCE ---- ----- --- ------------------------------------- ----- Richard L. Carrion...........Chairman, President 45 See under "Board of Directors" 1990 and CEO Jorge A. Junquera............Senior Executive 49 See under "Board of Directors" 1990 Vice President David H. Chafey Jr...........Senior Executive 44 See under "Board of Directors" 1990 Vice President
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EXECUTIVE OFFICER OF THE PRINCIPAL OCCUPATION AND BUSINESS CORPORATION NAME TITLE AGE EXPERIENCE DURING THE PAST FIVE YEARS SINCE ---- ----- --- ------------------------------------- ----- Maria Isabel P. de Burckhart...............Executive Vice 49 Supervisor of the Administration Group. 1990 President Executive Vice President of the Bank since January 1990. Executive Vice President of Popular North America, Inc. Member of the Board of Trustees of Fundacion Banco Popular, Inc. Member of the Board of Directors of Fundacion Ana G. Mendez since 1992, of Puerto Rico Community Foundation and of Puerto Rico Convention Bureau since 1993. Roberto R. Herencia..........Executive Vice 38 Head of the Corporation's U.S. business 1997 President expansion. Executive Vice President since January 1997. Director of Popular North America, Inc., Banco Popular, FSB, Equity One, Inc., Banco Popular, Illinois, Banco Popular, N.A. (California ), Banco Popular, N.A. (Florida) and Banco Popular, N.A. (Texas). Senior Vice President from December 1991 to December 1996. Vice President and U. S. Senior Credit Officer from April to December 1991. Larry B. Kesler..............Executive Vice 60 Supervisor of the Individual Credit Group 1990 President and the Virgin Islands Region. Executive Vice President of the Bank since January 1990. Executive Vice President of Popular North America, Inc. Chairman of the Board of Directors of Equity One, Inc., Popular Leasing & Rental, Inc. and Popular Mortgage, Inc. Director of Popular Finance, Inc. Humberto Martin..............Executive Vice 52 Supervisor of the Operations Group. 1986 President Executive Vice President of the Bank since November 1986. Executive Vice President of Popular North America, Inc. Emilio E. Pinero.............Executive Vice 49 Supervisor of the Commercial Banking Group. 1990 President Executive Vice President of the Bank since January 1990. Director of Popular Mortgage, Inc. and of Popular Leasing & Rental, Inc. Member of the Board of Trustees of American Red Cross since 1997. Member of the Board of Trustees of Fundacion Felisa Rincon de Gautier and Fundacion Sor Isolina Ferre since 1995. Member of the Board of Trustees of Inter American University of Puerto Rico since 1994. Executive Vice President of Popular North America, Inc.
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EXECUTIVE OFFICER OF THE PRINCIPAL OCCUPATION AND BUSINESS CORPORATION NAME TITLE AGE EXPERIENCE DURING THE PAST FIVE YEARS SINCE ---- ----- --- ------------------------------------- ----- Carlos Rom Jr................Executive Vice 41 Head of the Corporation's Caribbean and 1997 President Latin America business expansion. Executive Vice President since January 1997. Director of ATH Dominicana, Inc. since December 1995. Chairman of the Board of Directors of ATH Costa Rica since June 1996. Senior vice President from September 1995 to December 1996. Director of Marchand-ICS Group, Inc. since 1995 and of McConnell Consulting since 1997. Vice President and General Manager of Pizza Hut, a division of Pepsi Co., Inc. from July 1994 to September 1995. Senior Vice President and Manager of the Bank-San Juan Region from August 1991 to June 1994. Member of The United Way of PR's Board of Governors and of its Executive Committee from 1990 to 1994. Carlos J. Vazquez............Executive Vice 39 Supervisor of the Corporation's Risk 1997 President Management Group. Executive Vice President since March 1997. Director of Equity One, Inc., Popular Securities Incorporated and Popular North America, Inc. since June 1997. Vice President of J.P. Morgan & Co. Incorporated, Morgan Guaranty Trust Co. of N.Y., J.P. Morgan Securities Ltd., J.P. Morgan Securities, Inc. and J.P. Morgan Venezuela, S.A. from 1982 to 1997. Samuel T. Cespedes Secretary of the 61 Attorney-at-Law. Proprietary partner of the 1991 Board of Director law firm McConnell, Valdes. Secretary of the Board of Directors of the Bank since 1991. Secretary of the Board of Directors of Popular North America, Inc., Equity One, Inc., Popular Leasing & Rental, Inc. and Popular Finance, Inc.
FAMILY RELATIONSHIPS Mr. Richard L. Carrion, Chairman of the Board, President and CEO of the Corporation and the Bank, is brother-in-law of Mr. Julio E. Vizcarrondo Jr., Director. Mr. Alfonso F. Ballester, Director, is brother-in-law of Mr. Hector R. Gonzalez, Director. Mr. J. Adalberto Roig Jr., Director, is first cousin of Mr. Antonio Luis Ferre, Director. OTHER RELATIONSHIPS AND TRANSACTIONS During 1997 the Bank engaged the legal services of the law firm of Dubon & Dubon of which director Luis E. Dubon, Jr. is a partner and of McConnell, Valdes of which Mr. Samuel T. Cespedes, Secretary of the Board of Directors of the Corporation and the Bank is a partner. The amount of fees paid to Dubon & Dubon by the Corporation and its subsidiaries during 1997 fiscal year was $313,142. The amount of fees paid to McConnell Valdes did not exceed 5% of the law firm revenues for its last full fiscal year. 14 16 The Bank has had loan transactions with the Corporation's directors and officers, and with their associates, and proposes to continue such transactions in the ordinary course of its business, on substantially the same terms as those prevailing for comparable loan transactions with other people and subject to the provisions of the Banking Act of the Commonwealth of Puerto Rico and the applicable federal laws and regulations. The extensions of credit have not involved nor presently involve more than normal risks of collectibility or other unfavorable features. EXECUTIVE COMPENSATION PROGRAM REPORT OF THE BANK'S HUMAN RESOURCES AND COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION OVERVIEW The Bank's Human Resources and Compensation Committee ("The Human Resources Committee") consists of five non-employee directors. The Committee endeavors to keep abreast of competitive compensation practices in regard to salaries, incentives compensation and supplemental programs, that will retain top quality executive officers who will enhance shareholder value through sustained growth. The Human Resources Committee evaluates and recommends to the Board of Directors the Corporation's compensation policy for the Chairman of the Board, President and CEO, and Executive Officers. The Human Resources Committee considers among other factors, competitive pay practices for developing a stronger relationship between executive compensation and the Bank's long-term performance. It is kept appraised of such competitive pay practices by an independent consultant who conducts a periodical analysis of executive compensation of a peer group of financial institutions similar in size, scope and business orientation (the "Peer Group"). On an annual basis the banking peer group used by the Committee for comparison purposes is reviewed in light of industry developments, and significant mergers/acquisitions, to ensure that it is consistent with the Corporation's size and focus. The Peer Group currently consists of eleven regional banking organizations with a retail banking emphasis. The Executive Compensation Program for principal officers of the Corporation's subsidiaries is set according to the industry and geographical area in which they operate, and is approved by the Board of Directors of each entity. CHAIRMAN OF THE BOARD, PRESIDENT AND CEO, MR. RICHARD L. CARRION On an annual basis Mr. Carrion submits to the Corporation's Executive Committee a plan setting forth both quantitative and intangible goals applicable to each year and long-term goals. Evaluations will be made against the goals set forth in the plan. During 1997 Mr. Carrion's base salary remained the same. The Executive Committee evaluates Mr. Carrion's performance by taking into consideration the growth of the organization, implementation of a diversification strategy, achievement of financial goals, improvements to the product and service delivery system and development of human resources. The weight and significance accorded to these factors is subjective in nature and the weight assigned to each factor in determining compensation adjustments cannot be quantified. Mr. Carrion participates in an annual incentive program designed to enhance achievement of short-term financial goals and to increase shareholder value. The first incentive component could represent 15% of base salary, if the net income target is met, and if the net income target is exceeded it could reach 25%. Although the threshold continues to be 100% of target, the Human Resources Committee may recommend a discretionary bonus if results obtained are at least 95% of the pre-established net income target. The second component, which is based on return on equity (ROE) and is designed to enhance an increase in shareholder value, could range from 5% to 30% of base salary, depending on the ROE obtained. Additionally, the bonus award may be increased by 25% when shareholder return exceeds 20% annually on a consecutive three year period. Total shareholder return is calculated by taking into account the compounded annual yield of the stock, considering the market appreciation, dividends received and dividend reinvestment. This third and last bonus component recognizes consistent improvement in shareholder value. The maximum total incentive bonus that may be awarded could be 68.75% of basic salary if all components of the bonus program are achieved. 15 17 For 1997, this incentive bonus was 43.21% of base salary. The first objective of net income after tax was 101% of target net income. The ROE obtained was 15.83% compared to a minimum of 15% required. Total shareholder return which was to exceed 20% annually on a consecutive three year period, was 55.34% for the three-year period ended December 31, 1997. EXECUTIVE OFFICERS The group of Executive Officers is composed of two Senior Executive Vice Presidents and seven Executive Vice Presidents, all of whom participate in the Profit Sharing, Annual Incentive and Long-Term Incentive Plans. The President and CEO recommends to the Board of Directors of the Bank, for their approval, the salary increases and the bonuses to be awarded to the Executive Officers pursuant to the incentive plans. The salary increase program allows discretionary salary increases based on individual performance to be twice the team increases. It provides the CEO the opportunity to recognize changes in individual responsibilities and performance levels. Each Executive Officer participates in the Annual Incentive Plan. In 1997 a bonus of 43.21% of base salary was awarded to them. The net income after tax was 101% of target net income. The ROE obtained was 15.83% compared to a minimum of 15% required and total shareholder return which was to exceed 20% annually on a consecutive three year period, was 55.34% for the three-year period ended December 31, 1997. HUMAN RESOURCES AND COMPENSATION COMMITTEE Salustiano Alvarez Mendez Francisco M. Rexach Jr. Esteban D. Bird Julio E. Vizcarrondo Jr. Hector R. Gonzalez EXECUTIVE COMPENSATION The following table sets forth all cash compensation paid by the Corporation or its subsidiaries to the ten highest paid Executive Officers of the Corporation and the two most highly compensated principal officers of the Corporation's subsidiaries for 1997. SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM FISCAL ------------------- ALL OTHER INCENTIVE PLAN YEAR SALARY(A) BONUS(B) OTHER(C) COMPENSATION(D) PAYOUTS(E) TOTAL ---- --------- -------- -------- --------------- ---------- ----- Richard L. Carrion .......................... 1997 $500,000 $275,942 -0- $62,181 $91,195 $ 929,318 Chairman, 1996 475,000 399,889 -0- 56,558 55,535 986,982 President and CEO 1995 350,000 75,107 -0- 36,744 -0- 461,851 Jorge A. Junquera ........................... 1997 350,000 197,954 -0- 44,401 64,646 657,001 Senior Executive Vice President 1996 291,351 240,468 -0- 35,305 36,449 603,573 of the Corporation 1995 245,042 53,096 -0- 25,690 -0- 323,828 David H. Chafey Jr. ......................... 1997 350,000 197,909 -0- 44,401 63,240 655,550 Senior Executive Vice President 1996 290,451 240,357 -0- 35,196 35,660 601,664 of the Corporation 1995 239,713 51,897 -0- 25,680 -0- 317,290 Larry B. Kesler ............................. 1997 235,648 132,537 -0- 29,895 51,488 449,568 Executive Vice President 1996 207,488 168,163 -0- 25,143 29,023 429,817 of the Corporation 1995 195,168 42,238 -0- 20,909 -0- 258,315 Humberto Martin ............................. 1997 225,978 127,075 -0- 28,668 48,462 430,183 Executive Vice President 1996 198,391 161,198 -0- 24,039 27,337 410,965 of the Corporation 1995 183,695 39,732 -0- 19,679 -0- 243,106
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ANNUAL COMPENSATION LONG-TERM FISCAL ------------------- ALL OTHER INCENTIVE PLAN YEAR SALARY(A) BONUS(B) OTHER(C) COMPENSATION(D) PAYOUTS(E) TOTAL ---- --------- -------- -------- --------------- ---------- ----- Maria Isabel P. de Burckhart ................ 1997 $223,187 $125,109 -0- $28,314 $50,349 $ 426,959 Executive Vice President 1996 201,285 162,919 -0- 24,391 28,377 416,972 of the Corporation 1995 190,848 41,309 -0- 20,446 -0- 252,603 Emilio E. Pinero ............................ 1997 205,720 115,125 -0- 25,927 47,576 394,348 Executive Vice President 1996 188,677 152,579 -0- 22,863 26,835 390,954 of the Corporation 1995 180,337 39,118 -0- 18,733 -0- 238,188 Carlos J. Vazquez(f) ........................ 1997 207,308 179,286 -0- 1,770 -0- 388,364 Executive Vice President of the Corporation Roberto R. Herencia(f) ...................... 1997 201,667 112,248 -0- 25,584 -0- 339,499 Executive Vice President 1996 180,000 88,366 -0- 21,782 -0- 290,148 of the Corporation Carlos Rom Jr.(f) ........................... 1997 184,500 104,400 -0- 23,406 -0- 312,306 Executive Vice President 1996 155,100 74,562 -0- 18,794 -0- 248,456 of the Corporation Thomas J. Fitzpatrick ....................... 1997 300,000 867,500 -0- 79,209 -0- 1,246,709 President of Equity One, Inc. (a wholly- 1996 275,000 156,000 -0- 72,288 -0- 503,288 owned subsidiary of Banco Popular, FSB) 1995 260,000 690,048 153,700 54,934 -0- 1,158,682 Kenneth McGrath ............................. 1997 170,833 194,410 -0- 39,750 -0- 404,993 President of Popular Securities Incorpora- 1996 150,000 188,200 -0- 65,750 -0- 403,950 ted (a wholly-owned subsidiary of 1995 100,000 128,940 -0- 8,750 -0- 237,690 the Corporation)
- ----------------- (a) Salaries before deductions. (b) For the Bank's Executive Officers the bonus amount includes Christmas bonus, the bonus awarded under the Annual Management Incentive Compensation Plan and the cash portion payable under the Profit Sharing Plan of the Bank, except for Mr. Vazquez's bonus, which does not includes a Profit Sharing bonus but rather a special bonus of $49,000 paid with the Corporation's common stock purchased in the open market. For Mr. Fitzpatrick, the amount includes the annual performance bonus and a three year long-term incentive bonus payable under his employment agreement. For Mr. McGrath, the amount includes Christmas and performance bonus. (c) Does not include the value of perquisites and other personal benefits because the aggregate amount of such benefits does not exceed lesser of $50,000 or 10% of total amount of annual salary and bonus of any named individual. In the case of Mr. Fitzpatrick includes amounts payable to compensate him for certain taxes payable by him with respect to the bonus received in 1995 under his employment agreement. (d) For the Bank's Executive Officers, except for Mr. Vazquez, amount includes deferred portion awarded under the Profit Sharing Plan of the Bank, amounts accrued under the Benefit Restoration Plan, the amount from the Profit Sharing deferred and allocated to Stock Plan and the Bank's matching contribution to Stock Plan, which are described on page 19 thru 21. In the case of Mr. Vazquez the amount only includes the Bank's matching contribution to Stock Plan. For Mr. McGrath, amount includes matching contribution to 1165(e) plan and a deferred portion of the performance bonus. For Mr. Fitzpatrick, these amounts represent the contribution of Equity One, Inc. pursuant to Section 401(k) matching and deferred compensation under Supplementary Executive Retirement Plan. (e) For the Plan Year ended December 31, 1997, the three year average ROE target was not achieved, nor the Peer Group three year average median ROE was exceeded. However, since Popular, Inc.'s average ROE represented an improvement of 41.78% over the base year ROE compared to Peer's median ROE, the Human Resources and Compensation Committee approved a discretionary bonus of 25% of the total stock awarded at the beginning of the Plan Year, including dividends and adjusted for the stock split. On March 12, 1998, 7,413 common shares were purchased in the open market at the price of $56.25. All Executive Officers selected to defer the incentive payment, except Mrs. Maria Isabel P. de Burckhart, Mr. Humberto Martin and Mr. Larry Kesler. This alternative is an amendment to the original Plan that was approved by the Board of Directors in December 1996. (f) Information presented for 1997, 1996 and 1995, except for Messrs. Carlos J. Vazquez, Roberto R. Herencia, and Carlos Rom Jr. who were appointed Executive Officers in 1997. No disclosure is required with respect to these officers. 17 19 Long-Term Incentive Plan The Board of Directors approved in 1994 the Senior Executive Long-Term Incentive Plan. A set percentage of the base salary of each participant at the beginning of each Plan Year, is used to determine the dollar amount to be divided by an average closing price of the Corporation's common stock for the Incentive Payment. The incentive payment shall be made in common stock of the Corporation. All common stock to be awarded under this program is purchased in the open market. This Long-Term Incentive Plan divides the incentive payment as follows: 75% based on the attainment of a pre-established three-year average ROE objective for the performance period and 25% based on the achievement of an average ROE greater than the Peer Group's three-year average median ROE. In 1998, 1997, 1996 and 1995 awards of performance shares under the Long-Term Incentive Plan were granted to the Executive Officers as set forth below:
LONG-TERM INCENTIVE AWARDS ESTIMATED FUTURE PAYOUTS NON-STOCK-PRICE BASED PLANS NUMBER OF SHARES (A) ---------------------------- NUMBER PERFORMANCE OF PERIOD NAME YEAR SHARES (A) UNTIL PAYOUT THRESHOLD TARGET MAXIMUM ---- ---- ---------- ------------ --------- ------ ------- Richard L. Carrion..... 1998 5,046.57 1/1/98-12/31/00 -- 5,046.57 10,093.14 1997 7,695.60 1/1/97-12/31/99 -- 7,695.60 15,391.20 1996 6,317.28 1/1/96-12/31/98 -- 6,317.28 12,634.56 1995 5,985.98 1/1/95-12/31/97 -- 5,985.98 11,971.96 Jorge A. Junquera...... 1998 3,924.21 1/1/98-12/31/00 -- 3,924.21 7,848.42 1997 5,540.85 1/1/97-12/31/99 -- 5,540.85 11,081.70 1996 3,790.37 1/1/96-12/31/98 -- 3,790.37 7,580.74 1995 4,243.29 1/1/95-12/31/97 -- 4,243.29 8,486.58 David H. Chafey Jr..... 1998 4,033.22 1/1/98-12/31/00 -- 4,033.22 8,066.44 1997 5,540.85 1/1/97-12/31/99 -- 5,540.85 11,081.70 1996 3,790.37 1/1/96-12/31/98 -- 3,790.37 7,580.74 1995 4,151.00 1/1/95-12/31/97 -- 4,151.00 8,302.00 Roberto R. Herencia.... 1998 2,328.69 1/1/98-12/31/00 -- 2,328.69 4,657.38 1997 3,170.60 1/1/97-12/31/99 -- 3,170.60 6,341.20 Larry B. Kesler........ 1998 2,650.11 1/1/98-12/31/00 -- 2,650.11 5,300.22 1997 3,707.52 1/1/97-12/31/99 -- 3,707.52 7,415.04 1996 2,646.49 1/1/96-12/31/98 -- 2,646.49 5,292.98 1995 3,379.65 1/1/95-12/31/97 -- 3,379.65 6,759.30 Maria Isabel P. 1998 2,500.04 1/1/98-12/31/00 -- 2,500.04 5,000.08 de Burckhart......... 1997 3,497.58 1/1/97-12/31/99 -- 3,497.58 6,995.16 1996 2,563.50 1/1/96-12/31/98 -- 2,563.50 5,127.00 1995 3,304.84 1/1/95-12/31/97 -- 3,304.84 6,609.68 Humberto Martin........ 1998 2,494.72 1/1/98-12/31/00 -- 2,494.72 4,989.44 1997 3,555.38 1/1/97-12/31/99 -- 3,555.38 7,110.76 1996 2,537.92 1/1/96-12/31/98 -- 2,537.92 5,075.84 1995 3,180.96 1/1/95-12/31/97 -- 3,180.96 6,361.92 Emilio E. Pinero....... 1998 2,298.06 1/1/98-12/31/00 -- 2,298.06 4,596.12 1997 3,215.00 1/1/97-12/31/99 -- 3,215.00 6,430.00 1996 2,399.23 1/1/96-12/31/98 -- 2,399.23 4,798.46 1995 3,122.82 1/1/95-12/31/97 -- 3,122.82 6,245.64 Carlos Rom Jr.......... 1998 2,051.94 1/1/98-12/31/00 -- 2,051.94 4,103.88 1997 2,924.34 1/1/97-12/31/99 -- 2,924.34 5,848.68 Carlos J. Vazquez...... 1998 3,025.42 1/1/98-12/31/00 -- 3,025.42 6,050.84
(a) the number of shares for 1996 and 1995 were adjusted to reflect a stock split of one share for each share outstanding effected in a form of a dividend, effective July 1, 1996. 18 20 The share awards shown above are payable at the end of each three-year performance period if objectives are attained. Dividends that would be payable on the shares of stock, if they were held by the Executive Officers, will be credited and become part of the Incentive Payment. At the option of the participant, a portion equal to the estimated tax due with respect to the incentive payments of the awards may be paid in cash. If the Corporation's target is met or exceeded, the share payments corresponding to the Corporation's and Peer Group's goals are increased separately by a leverage factor that cannot exceed two times the target share amounts. Even if the ROE for the Corporation does not equal or exceed the Peer three-year average median ROE, the Human Resources and Compensation Committee, at its own discretion, may recommend the distribution of 25% of the targeted bonus if the results attained for the Plan Year average represent an improvement of no less than 25% over the base year. For the Plan Year ended December 31, 1997, the three year average ROE target was not achieved, nor the Peer Group three year average median ROE was exceeded. However, since Popular, Inc.'s average ROE represented an improvement of 41.78% over the base year ROE compared to Peer's median ROE, the Human Resources and Compensation Committee approved a discretionary bonus of 25% of the total stock awarded at the beginning of the Plan Year, including dividends and adjusted for the stock split. On March 12, 1998, 7,413 common shares were purchased in the open market at the price of $56.25. All Executive Officers selected to defer the incentive payment, except Mrs. Maria Isabel P. de Burckhart, Mr. Humberto Martin and Mr. Larry Kesler. This alternative is an amendment to the original Plan that was approved by the Board of Directors in December 1996. OTHER INCENTIVE COMPENSATION PLANS The Bank has an Annual Management Incentive Plan for different management levels. Under this Plan, incentive bonuses are based on individual performance as well as the Corporation or Bank's performance, measured by net income and ROE. The weight assigned to the Corporation or the Bank's performance objectives varies according to management level, but the weight of individual performance applies equally to all managers participating. The Bank also has an Excellence in Performance Program in which all employees participate. This program rewards employees for extraordinary personal contributions that are non-recurring in nature, typically not recognizable through merit or promotional salary action, and clearly recognized as such by management and peers alike. Additionally, the Bank has several functional incentive programs that reward employees' productivity in specific areas. PROFIT SHARING PLAN OF THE BANK All officers and regular monthly salaried employees of the Bank as of January 1, 1976, or hired after that date, are active participants in the Bank's operating earnings under the yearly Profit Sharing Plan, as of the first day of the calendar month following completion of one year of service. Under this plan the Bank's annual contribution is determined by the Board of Directors based on the profits of the Bank for the year. The amount allocated to each officer or employee is based on his or her earned salary for the year. The total amount contributed for the year 1997 was $26,348,027 of which 50% was contributed to the Profit Sharing Plan, 10% to the Stock Plan and the remainder was paid in cash. BENEFIT RESTORATION PLAN OF THE BANK The Internal Revenue Service (IRS) set a limit of $160,000 as the amount of compensation that may be considered in calculating future retirement payments from qualified pension plans. This limit applies to the Bank's Retirement Plan, Profit Sharing and Stock Plan. The Board of Directors has approved a "Benefit Restoration Plan" for those officers whose annual compensation is higher than the established limit. This non-qualified plan will provide those benefits that cannot be accrued under the Bank's Retirement and Profit Sharing Plan, which are qualified plans. Benefits under the Benefit Restoration Plan shall be equal to the account balance that would be provided under the Profit Sharing Plan and equal to the benefits that would have been accrued under the Retirement Plan. The Plan is unfunded. 19 21 RETIREMENT PLAN OF THE BANK The Bank has a non-contributory, defined benefit Retirement Plan covering substantially all regular monthly employees. Monthly salaried employees are eligible to participate in the Plan following the completion of one year of service and 21 years of age. Pension costs are funded in accordance with the minimum funding standards under the Employee Retirement Income Security Act ("ERISA"). The basis for the Retirement Plan formula is Total Compensation, which includes Christmas Bonus, incentives, overtime, differentials, Profit Sharing cash bonuses and any other compensation received by the employees. Benefits are paid on the basis of a straight life annuity plus supplemental death benefits and are not reduced for Social Security or other payments received by participants. Normal retirement age at the Bank is a combination of years of age and completed years of service totalling 75. Meanwhile, early retirement is at 55 years of age with 10 years of service. Employees with 30 years of service or more are provided with a retirement benefit of 40% of Total Compensation. Benefits are reduced only if the employee retires before age 55. Benefits are subject to the U.S. Internal Revenue Code limits on compensation and benefits. The following table sets forth the estimated annual benefits that would become payable under the Retirement Plan and the Benefit Restoration Plan based upon certain assumptions as to total compensation levels and years of service. The amounts payable in this table are not necessarily representative of amounts that may actually become payable under the plans. The amounts represent the benefits upon retirement on December 31, 1997, of a participant at age 65.
TOTAL COMPENSATION ESTIMATED ANNUAL BENEFITS / YEARS OF SERVICE - ------------------------------------------------------------------------------------------------------ 15 20 25 30 35 -- -- -- -- -- $1,000,000 $ 183,000 $255,000 $ 328,000 $400,000 $400,000 900,000 164,000 230,000 295,000 360,000 360,000 800,000 146,000 204,000 262,000 320,000 320,000 700,000 128,000 179,000 229,000 280,000 280,000 600,000 110,000 153,000 197,000 240,000 240,000 500,000 91,000 128,000 164,000 200,000 200,000 400,000 73,000 102,000 131,000 160,000 160,000 300,000 55,000 77,000 98,000 120,000 120,000
The 1997 total compensation and estimated years of service at age 65 for the five highest paid key policy-making Executive Officers are as follows.
Estimated 1997 Years of Total Service Compensation At Age 65 ------------ --------- Richard L. Carrion $ 929,000 41.5 Jorge A. Junquera 657,000 42.3 David H. Chafey Jr. 656,000 38.5 Larry B. Kesler 450,000 16.5 Humberto Martin 430,000 42.0
STOCK PLAN OF THE BANK The Bank has adopted two Stock Plans, one covering employees of the Bank in Puerto Rico and another covering employees of the Bank in the U.S., and the British and U.S. Virgin Islands. All regular monthly salaried employees are eligible to participate in the Stock Plans following the completion of three-months of service. 20 22 The Bank may contribute a discretionary amount based on the profits of the Bank for the year, which is allocated to each officer or employee based on his or her basic salary for the year, as determined by the Board of Directors. The Stock Plans also allow employees to voluntarily elect to defer a predetermined percentage not to exceed 10% of their pre-tax base compensation (after tax in the British Virgin Islands) up to a maximum amount as determined by the applicable tax laws. The Bank will match 50% of the amount contributed by a participant up to a maximum of 2% of the participant's annual base salary. All contributions to the Stock Plans will be invested in shares of common stock of the Corporation which are purchased in the open market. POPULAR, INC. PERFORMANCE GRAPHS On prior years the performance graph was prepared using S & P 500 indexes since the National Association of Securities Dealers Automated Quotation (NASDAQ) Composite Index was not calculated on a total return basis. However, this year the Center for Research in Security Prices (CRSP) at the University of Chicago prepared for NASDAQ the NASDAQ Stock Market Total Return Index for the past six years to comply with the Securities and Exchange Commission proxy rules. Graph A, shown below, compares the cumulative total shareholder return during the measurement period with the cumulative total return, assuming reinvestment of dividends, of the NASDAQ Stock Market Index and the NASDAQ Bank Composite Index, while Graph B presents the above comparison using S & P 500 indexes. For both graphs the cumulative total shareholder return was obtained by dividing (i) the cumulative amount of dividends per share, assuming dividend reinvestment, since the measurement point, December 31, 1992 plus (ii) the change in the per share price since the measurement date, by the share price at the measurement date. GRAPH A COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN TOTAL RETURN AS OF DECEMBER 31 (DECEMBER 31, 1992 = 100)
BASE PERIOD COMPANY / INDEX 1992 1993 1994 1995 1996 1997 - -------------------------------------------------------------------------------- POPULAR INC 100 105.69 99.02 140.84 251.89 376.18 NASDAQ BANKS COMPOSITE 100 114.042 113.627 169.222 223.412 377.438 NASDAQ STOCK MARKET 100 114.796 112.214 158.699 195.192 239.527
21 23 Graph B COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN TOTAL RETURN AS OF DECEMBER 31 (DECEMBER 31, 1992 = 100)
BASE PERIOD COMPANY / INDEX DEC92 DEC93 DEC94 DEC95 DEC96 DEC97 - -------------------------------------------------------------------------------- POPULAR INC 100 105.69 99.02 140.84 251.89 376.18 BANKS COMPOSITE 100 110.24 104.59 166.66 235.91 340.76 S&P 500 INDEX 100 110.08 111.53 153.45 188.68 251.63
INDEPENDENT PUBLIC ACCOUNTANTS In November 1997, the partners of Price Waterhouse and of Coopers & Lybrand voted to approve the merger of the two organizations. The next step in the merger effort is obtaining approval from regulatory authorities. This process is expected to be completed in the summer of 1998. The Board of Directors intends to retain the services of Price Waterhouse or the resulting public accountants firm as the independent auditors of the Corporation for the year 1998. Price Waterhouse has served as independent auditors of the Bank since 1971 and of the Corporation since May 1991, when it was appointed by the Board of Directors. Representatives of Price Waterhouse will attend the Stockholders Meeting and will be available to answer any questions that may arise; they will also have the opportunity to make a statement if they so desire. INCORPORATION BY REFERENCE The Form 10K, audited financial statements, certain supplemental financial information and Management Discussion and Analysis of Financial Condition and Results of Operations included in the Corporation's Annual Report to Stockholders for the year ended December 31, 1997, which accompany this Proxy Statement are hereby incorporated by reference herein. In addition, all documents filed by the Corporation pursuant to Section 13(a) of the Securities Exchange Act of 1934 subsequent to the date of this Proxy Statement and prior to the Annual Meeting shall be deemed to be incorporated by reference herein. 22 24 PROPOSALS OF SECURITY HOLDERS TO BE PRESENTED AT THE 1999 ANNUAL MEETING OF STOCKHOLDERS Stockholders' proposals intended to be presented at the 1999 Annual Meeting of Stockholders must be received by the Corporate Secretary, at its principal executive offices, Popular Center Building, San Juan, Puerto Rico, 00918, not later than November 25, 1998 for inclusion in the Corporation's Proxy Statement and Form of Proxy relating to the 1999 Annual Meeting of Stockholders. OTHER MATTERS Management does not know of any other matters to be brought before the Meeting other than those described previously. Proxies in the accompanying form will confer discretionary authority to Management with respect to any such other matters presented at the meeting. To avoid delays in ballot taking and counting, and in order to assure that your Proxy is voted in accordance with your wishes, compliance with the following instructions is respectfully requested: upon signing a Proxy as attorney, executor, administrator, trustee, guardian, authorized officer of a corporation, or on behalf of a minor, please give full title. If shares are in the name of more than one recordholder, all should sign. Whether or not you plan to attend the Meeting, it is very important that your shares be represented and voted in the Meeting. Accordingly, you are urged to properly complete, sign, date and return your Proxy Card. San Juan, Puerto Rico, March 18, 1998 RICHARD L. CARRION SAMUEL T. CESPEDES Chairman of the Board, President Secretary and Chief Executive Officer 23 25 [POPULAR, INC. LOGO] 26 APPENDIX THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS. PROXY The undersigned hereby appoints Richard L. Carrion, Jorge A. Junquera and David (POPULAR, INC. LOGO) H. Chafey Jr. as Proxies, each with the power to appoint his substitute, and P.O. Box 362708 authorizes them to represent and to vote as designated below all the shares of San Juan, Puerto Rico 00936-2708 common stock of Popular, Inc. held on record by the undersigned on March 4, 1998, at the Annual Meeting of Shareholders to be held at the Centro Europa Building, 3rd Floor, San Juan, Puerto Rico, on April 23, 1998, at 10:00 a.m. or at any adjournments thereof, as follows: 1. ELECTION OF DIRECTORS - Nominees: LUIS E. DUBON JR. HECTOR R. GONZALEZ MANUEL MORALES JR. FRANCISCO M. REXACH JR. JULIO E. VIZCARRONDO JR. / / VOTE GRANTED FOR all nominees / / VOTE WITHHELD FOR all nominees / / VOTE GRANTED, except for the following nominee(s) (insert in the space provided below the names of those nominees for whom you do not wish to vote) 2. AT THEIR DISCRETION, the Proxies are authorized to vote upon such other business as may properly come before the Meeting. THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED "FOR" ITEM 1. Please refer to instructions below. ---------------------------------------- Signature ---------------------------------------- Signature ----------------------- DATE (VEA AL DORSO TEXTO EN ESPANOL) PLEASE SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE. No Postage is required if mailed in the United States, Puerto Rico or the U.S. Virgin Islands. - ----------------------------- INSTRUCTIONS: Please sign exactly as your name appears above. When shares are Annual Meeting held by joint tenants or by tenants in common, each holder should sign. When of signing as attorney, executor, administrator, trustee or guardian, please give (POPULAR, INC. LOGO) full title as such. If a corporation, the president or other authorized officer should sign under the full corporate name and the position of such authorized - ----------------------------- officer should appear below the signature. If a partnership, please sign in partnership name by authorized person. (MAP) Thursday, April 23, 1998 10:00 a.m. Centro Europa Building San Juan, Puerto Rico
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